<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 1-11422
PENNCORP FINANCIAL GROUP, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 13-3543540
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(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
745 Fifth Avenue, Suite 500, NY, NY 10151
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 832-0700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
$3.375 Convertible Preferred New York Stock Exchange
Stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained in the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 14, 1997: $1,038,930,511.50.
The number of Common Stock shares outstanding as of March 14, 1997 was
28,462,502.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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PAGE 2
PENNCORP FINANCIAL GROUP, INC.
ANNUAL REPORT ON FORM 10-K/A
FOR THE YEAR ENDED DECEMBER 31, 1996
TABLE OF CONTENTS
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Page
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PART II
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . 3
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . 57
</TABLE>
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PAGE 3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
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Page
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PennCorp Financial Group, Inc. and Subsidiaries 4
Southwestern Financial Corporation and Subsidiaries 30
</TABLE>
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PAGE 4
INDEPENDENT AUDITOR'S REPORT
The Shareholders and Board of Directors
PennCorp Financial Group, Inc.
We have audited the accompanying consolidated balance sheets of PennCorp
Financial Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1996. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of PennCorp Financial
Group, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
KPMG PEAT MARWICK LLP
Raleigh, North Carolina
February 28, 1997
PENNCORP FINANCIAL GROUP, INC.
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PAGE 5
CONSOLIDATED STATEMENTS
of income
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<CAPTION>
(Amounts in thousands, except per share information) FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
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REVENUES:
Premiums, principally accident and sickness $ 256,859 $ 239,010 $ 214,674
Interest sensitive policy product charges 91,231 62,879 29,748
Net investment income 213,563 102,291 51,850
Other income 6,132 12,845 1,056
Net gains (losses) from the sale of investments 1,257 595 (3,556)
-------------------------------------------
Total revenues 569,042 417,620 293,772
-------------------------------------------
BENEFITS AND EXPENSES:
Claims incurred 188,727 141,876 112,650
Change in liability for future policy benefits and other
policy benefits 79,085 18,126 (9,329)
Amortization of present value of insurance in force and
deferred policy acquisition costs 52,877 47,732 30,948
Amortization of costs in excess of net assets acquired 7,990 6,557 5,241
Underwriting and other administrative expenses 97,685 93,272 77,407
Interest and amortization of deferred debt issuance costs 18,979 19,780 18,274
-------------------------------------------
Total benefits and expenses 445,343 327,343 235,191
-------------------------------------------
Income before income taxes, undistributed earnings in unconsolidated
affiliates and extraordinary charge 123,699 90,277 58,581
Income taxes 45,418 31,642 21,437
-------------------------------------------
Net income before undistributed earnings in unconsolidated affiliates and
extraordinary charge 78,281 58,635 37,144
Undistributed earnings in unconsolidated affiliates 21,102 4,718 -
-------------------------------------------
Net income before extraordinary charge 99,383 63,353 37,144
Extraordinary charge (net of income taxes of $1,277, $- and $-) (2,372) - -
-------------------------------------------
Net income 97,011 63,353 37,144
Preferred stock dividend requirements 14,646 6,540 1,151
-------------------------------------------
Net income applicable to common stock $ 82,365 $ 56,813 $ 35,993
======================================================================================================================
PER SHARE INFORMATION:
Primary:
Net income applicable to common stock before extraordinary charge $ 2.98 $ 2.47 $ 1.82
Extraordinary charge, net of income taxes (0.08) - -
-------------------------------------------
Net income applicable to common stock $ 2.90 $ 2.47 $ 1.82
Common shares used in computing primary earnings per share 28,462 22,985 19,830
Fully diluted:
Net income applicable to common stock before extraordinary charge $ 2.74 $ 2.36
Extraordinary charge, net of income taxes (0.07) -
--------------------------
Net income applicable to common stock $ 2.67 $ 2.36
Common shares used in computing fully diluted earnings per share 35,229 25,566
</TABLE>
See accompanying Notes to Consolidated Financial Statements
PENNCORP FINANCIAL GROUP, INC.
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PAGE 6
CONSOLIDATED BALANCE SHEETS
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(Amounts in thousands, except share information) AS OF DECEMBER 31,
1996 1995
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ASSETS:
Investments:
Fixed maturity securities:
Held for investment, at amortized cost (fair value $89,759 in 1996 and $51,354 in 1995) $ 87,330 $ 51,366
Available for sale, at fair value (amortized cost $2,941,750 in 1996 and $1,414,187 in 1995) 2,993,925 1,486,985
Equity securities available for sale, at fair value (cost $17,511 in 1996 and $13,707 in 1995) 20,867 15,172
Trading securities, at fair value 31,140 86,104
Mortgage loans on real estate, net of allowance of $11,945 in 1996 and $- in 1995 256,998 36,563
Policy loans 145,976 125,179
Short term investments 63,113 416,953
Other investments 46,848 43,937
--------------------------
Total investments 3,646,197 2,262,259
Cash 39,464 27,778
Accrued investment income 48,643 30,992
Accounts and notes receivable, net of allowance of $6,528 in 1996 and $8,388 in 1995 47,307 34,842
Investments in unconsolidated affiliates 144,652 119,390
Present value of insurance in force 351,973 288,664
Deferred policy acquisition costs 268,356 193,903
Costs in excess of net assets acquired 148,174 121,795
Other assets 138,967 70,383
--------------------------
Total assets $ 4,833,733 $ 3,150,006
==============================================================================================================================
LIABILITIES:
Policy liabilities and accruals:
Future policy benefits $ 3,476,801 $ 2,153,607
Policy and contract claims 44,878 36,429
Other policyholder funds 40,429 39,011
--------------------------
Total policy liabilities and accruals 3,562,108 2,229,047
Income taxes payable, primarily deferred 65,036 24,977
Notes payable 210,325 307,271
Accrued expenses and other liabilities 118,401 92,198
--------------------------
Total liabilities 3,955,870 2,653,493
--------------------------
Mandatory redeemable preferred stock:
Series B, $.01 par value, $100 initial redemption value; authorized, issued and
outstanding 127,500 in 1996 and 1995 14,689 13,307
Series C, $.01 par value, $100 initial redemption value; authorized, issued and
outstanding 178,500 in 1996 and 1995 18,175 16,700
SHAREHOLDERS' EQUITY:
$3.375 Convertible Preferred Stock, $.01 par value, $50 redemption value; authorized
issued and outstanding 2,300,000 in 1996 and 1995 110,513 110,513
$3.50 Series II Convertible Preferred Stock, $.01 par value, $50 redemption value; authorized
issued and outstanding 2,875,000 in 1996 139,157 --
Common stock, $.01 par value; authorized 50,000,000; issued and outstanding
28,647,714 in 1996 and 22,879,708 in 1995 286 229
Additional paid-in capital 393,156 220,482
Unrealized foreign currency translation losses (14,969) (15,539)
Unrealized gains on securities available for sale 19,582 30,353
Retained earnings 202,144 125,375
Treasury shares (189,750 in 1996 and 1995) (3,370) (3,370)
Notes receivable secured by common stock (1,500) (1,537)
--------------------------
Total shareholders' equity 844,999 466,506
--------------------------
Total liabilities and shareholders' equity $ 4,833,733 $ 3,150,006
==============================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
PENNCORP FINANCIAL GROUP, INC.
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PAGE 7
CONSOLIDATED STATEMENTS
of changes in shareholders' equity
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<CAPTION>
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
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CONVERTIBLE PREFERRED STOCK:
Balance at beginning of year $ 110,513 $ - $ -
Issuance of convertible preferred stock 139,157 110,513 -
-------------------------------------------
Balance at end of year 249,670 110,513 -
-------------------------------------------
COMMON STOCK:
Balance at beginning of year 229 191 191
Issuance of common stock 56 38 -
Exercise of stock options 1 - -
-------------------------------------------
Balance at end of year 286 229 191
-------------------------------------------
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of year 220,482 169,310 169,301
Issuance of common stock 170,393 51,172 -
Exercise of stock options 2,281 - -
Treasury stock awarded to employees, net of unearned award - - 9
-------------------------------------------
Balance at end of year 393,156 220,482 169,310
-------------------------------------------
UNREALIZED FOREIGN CURRENCY TRANSLATION LOSSES:
Balance at beginning of year (15,539) (17,882) (13,118)
Change in unrealized foreign currency translation losses during
the year, net of income taxes 570 2,343 (4,764)
-------------------------------------------
Balance at end of year (14,969) (15,539) (17,882)
-------------------------------------------
UNREALIZED GAINS (LOSSES) ON SECURITIES AVAILABLE FOR SALE:
Balance at beginning of year 30,353 (24,454) -
Cumulative effect of accounting change, net of income taxes - - 9,328
Equity in unrealized losses of unconsolidated affiliate (6,045) - -
Change in unrealized gains (losses) on securities available for
sale during the year, net of income taxes (4,726) 54,807 (33,782)
-------------------------------------------
Balance at end of year 19,582 30,353 (24,454)
-------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 125,375 69,856 34,730
Net income 97,011 63,353 37,144
Dividends on common stock (5,630) (1,327) (765)
Amortization of discount and dividends on preferred stock (14,646) (6,540) (1,151)
Treasury stock awarded to employees, net of unearned award - - (102)
Earned portion of treasury stock awarded to employees 34 33 -
-------------------------------------------
Balance at end of year 202,144 125,375 69,856
-------------------------------------------
TREASURY SHARES:
Balance at beginning of year (3,370) (386) (280)
Purchases of treasury shares - (2,984) (232)
Treasury shares awarded to employees, net of unearned award - - 126
-------------------------------------------
Balance at end of year (3,370) (3,370) (386)
-------------------------------------------
NOTES RECEIVABLE SECURED BY COMMON STOCK: (1,500) (1,537) (115)
-------------------------------------------
Total shareholders' equity $ 844,999 $ 466,506 $ 196,520
======================================================================================================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements
PENNCORP FINANCIAL GROUP, INC.
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PAGE 8
CONSOLIDATED STATEMENTS
of cash flows
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<CAPTION>
(Amounts in thousands) FOR THE YEARS ENDED DECEMBER 31,
1996 1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income before undistributed earnings in unconsolidated affiliates and
extraordinary charge $ 78,281 $ 58,635 $ 37,144
Adjustments to reconcile net income before undistributed earnings in unconsolidated
affiliates and extraordinary charge to net cash provided by operating activities:
Capitalization of deferred policy acquisition costs (99,545) (83,795) (58,919)
Amortization of present value of business in force, deferred policy acquisition costs,
intangibles, depreciation and accretion, net 59,337 50,428 38,935
Increase (decrease) in policy liabilities and accruals and other policyholder funds 73,202 12,417 (29,894)
Purchases of trading securities -- (1,031) --
Sales of trading securities 56,004 47,145 --
Other, net (2,585) (8,126) 18,302
-----------------------------------
Net cash provided by operating activities 164,694 75,673 5,568
-----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash expended in acquisition of businesses, net of cash acquired
of $-, $- and $12,931 (99,596) (18,363) (89,137)
Purchases of fixed maturity securities held for investment (27,000) (15,950) (472)
Purchases of fixed maturity securities available for sale (920,430) (188,388) (174,872)
Purchases of equity securities (8,398) (13,415) (8,294)
Purchase of affiliate -- (107,366) --
Maturities of fixed maturity securities held for investment 42,351 6,214 18,098
Maturities of fixed maturity securities available for sale 81,538 27,198 41,370
Sales of fixed maturity securities held for investment 4,910 -- --
Sales of fixed maturity securities available for sale 368,331 99,804 83,182
Sales of equity securities 5,328 6,818 9,574
Decrease (increase) in short-term investments, net
(including changes in amounts due to broker) 412,687 39,392 (20,269)
Acquisitions and originations of mortgage loans (112,473) -- --
Sales of mortgage loans 151,972 -- --
Principal collected on mortgage loans 21,657 -- --
Other, net 4,521 (3,288) (3,553)
-----------------------------------
Net cash used in investing activities (74,602) (167,344) (144,373)
-----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of notes payable 230,000 130,783 83,500
Issuance of common stock 155,450 51,210 --
Issuance of preferred stock 139,157 110,513 33,034
Purchases of treasury stock -- (2,984) (232)
Reduction of notes payable (330,624) (91,507) (5,271)
Redemption of preferred stock -- (33,415) --
Receipts from interest sensitive products credited to policyholders' account balances 160,403 91,175 47,497
Return of policyholders' account balances on interest sensitive products (365,554) (144,413) (45,426)
Repurchase agreement, net (52,839) -- --
Other, primarily dividends, net (14,399) (4,950) --
-----------------------------------
Net cash provided (used) by financing activities (78,406) 106,412 113,102
-----------------------------------
Net increase (decrease) in cash 11,686 14,741 (25,703)
CASH AT BEGINNING OF YEAR 27,778 13,037 38,740
-----------------------------------
CASH AT END OF YEAR $ 39,464 $ 27,778 $ 13,037
==============================================================================================================================
SUPPLEMENTAL DISCLOSURES:
Income taxes paid (refunded) $ (4,992) $ 787 $ 2,474
Interest paid 18,185 20,001 15,443
NON-CASH FINANCING ACTIVITIES:
Debt assumed with acquisition -- 38,214 --
Securities issued in conjunction with acquisition 14,999 28,750 --
Amounts due on acquisition of affiliate -- 11,114 --
</TABLE>
See accompanying Notes to Consolidated Financial Statements
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 9
PAGE 9
NOTES TO CONSOLIDATED
financial statements
(1) BASIS OF PRESENTATION
PennCorp Financial Group, Inc. (the "Company", "PennCorp") is an insurance
holding company. The Company commenced operations with the acquisition of
Pennsylvania Life Insurance Company ("PLIC") and Executive Fund Life Insurance
Company (which was merged into PLIC effective July 1, 1996) and Pacific Life
and Accident Insurance Company ("PLAIC") on August 23, 1990. Through its
wholly-owned life insurance subsidiaries, PLIC and its wholly-owned subsidiary,
Penncorp Life Insurance Company (collectively referred to herein as "Penn
Life"), Peninsular Life Insurance Company ("Peninsular"), Professional
Insurance Corporation ("Professional"), Pioneer Security Life Insurance Company
("Pioneer Security") and its wholly-owned subsidiaries American-Amicable Life
Insurance Company of Texas and Pioneer American Insurance Company (Pioneer
Security and its subsidiaries collectively referred to herein as "AA Life"),
Salem Life Insurance Corporation ("Salem Life") and its wholly-owned
subsidiaries Integon Life Insurance Corporation ("ILIC") and Georgia
International Life Insurance Company and Occidental Life Insurance Company of
North Carolina ("OLIC") (Salem Life and its wholly-owned subsidiaries
collectively referred to herein as "Integon Life"), United Companies Life
Insurance Company ("UC Life"), and PLAIC, the Company offers a broad range of
accident and sickness, life, and accumulation insurance products to individuals
through a sales force that is contractually exclusive to certain of the
Company's subsidiaries and through general agents.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. All dollar amounts presented
hereafter, except share information, are stated in thousands.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Accounts that the
Company deems to be acutely sensitive to changes in estimates include deferred
policy acquisition costs, future policy benefits, policy and contract claims
and present value of insurance in force. In addition, the Company must
determine requirements for disclosure of contingent assets and liabilities as
of the date of the financial statements based upon estimates. In all instances,
actual results could differ from estimates.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENTS
Fixed maturities classified as held for investment are recorded at cost,
adjusted for amortization of premium or discount, as the Company has the intent
and ability to hold them to maturity. Fixed maturities and equity securities
classified as available for sale are recorded at fair value, as they may be
sold in response to changes in interest rates, prepayment risk, liquidity
needs, the need or desire to increase income or capital and other economic
factors. Changes in unrealized gains and losses related to securities available
for sale are recorded as a separate component of shareholders' equity, net of
applicable income taxes. Securities classified as trading securities are
reported at fair value with realized gains and losses and changes in unrealized
gains and losses included in the determination of net income as a component of
other income. The classification of securities as held for investment,
available for sale or trading is generally determined at the date of purchase.
The Company carries certain equity investments in affiliates on the equity
basis of accounting as a result of its percentage ownership and lack of voting
control. Mortgage-backed securities held for investment or available for sale
are amortized using the interest method including anticipated prepayments at
the date of purchase. Significant changes in estimated cash flows from original
assumptions are reflected in the period of such change. Mortgage loans on real
estate are recorded at cost, adjusted for amortization of premium or discount
and provision for loan loss, if necessary. Policy loans, short-term
investments, and other investments are recorded at cost, which approximates
market.
Realized investment gains and losses and declines in value which are other than
temporary, determined on the basis of specific identification, are included in
net income.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which was issued by the Financial Accounting
Standards Board in May 1993. Since December 1991, the Company has utilized
concepts considered in SFAS No. 115 regarding the classification of investments
in debt securities. The implementation of SFAS No. 115 has resulted in the
Company reflecting certain invested assets at fair value rather than lower of
aggregate cost or market as was the previous accounting practice. As of January
1, 1994 the adoption of SFAS No. 115 resulted in an increase in the value
reflected in the financial statements for the fixed maturity securities
available for sale of approximately $14,351 and an increase in shareholders'
equity of $9,328, net of deferred tax.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 10
PAGE 10
Notes to Consolidated Financial Statements, continued
In November 1995, the Financial Accounting Standards Board ("FASB") announced
that for the year ended December 31, 1995, companies that are subject to the
reporting requirements of SFAS No. 115 would have a one-time opportunity to
reclassify securities currently classified as held for investment without the
risk of tainting the accounting for investments on a historical basis. The
Company has evaluated the securities contained in this portfolio and has
determined under which conditions it may dispose of such securities. In light
of this review, the Company has reclassified approximately $61,410 of
securities which were previously classified as held for investment to available
for sale. The result of such reclassification was to increase shareholders'
equity by $1,198, net of applicable deferred income taxes.
INSURANCE REVENUE RECOGNITION
Accident and sickness insurance premiums are recognized as revenue ratably over
the time period to which premiums relate. Revenues from traditional life
insurance policies represent premiums which are recognized as earned when due.
Benefits and expenses are associated with earned premiums so as to result in
recognition of profits over the lives of the policies. This association is
accomplished by means of the provision for liabilities for future policy
benefits and the deferral and amortization of policy acquisition costs.
Revenues for interest sensitive products such as universal life and annuity
contracts represent charges assessed against the policyholders' account balance
for the cost of insurance, surrenders and policy administration. Benefits
charged to expenses include benefit claims incurred during the period in excess
of policy account balances and interest credited to policy account balances.
POLICY LIABILITIES
Liabilities for future policy benefits generally have been computed on the net
level premium method, based on estimated future investment yield, mortality,
morbidity and withdrawals. Estimates used are based on experience adjusted to
provide for possible adverse deviation. These estimates are periodically
reviewed and compared with actual experience. Future policy benefits for
interest sensitive products include the balance that accrues to the benefit of
the policyholders and amounts that have been assessed to compensate the life
insurance subsidiaries for services to be provided in the future.
Policy and contract claims represent estimates of both reported claims and
claims incurred but not reported based on experience.
ACCOUNTS AND NOTES RECEIVABLE
Accounts and notes receivable consist primarily of agents' balances and
premiums receivable from agents and policyholders in the United States and
Canada. Agents' balances are partially secured by commissions due to agents in
the future and premiums receivable are secured by policy liabilities. An
allowance for doubtful accounts is established, based upon specific
identification and general provision, for amounts which the Company estimates
will not ultimately be collected.
DEFERRED POLICY ACQUISITION COSTS
Estimated costs of acquiring new business which vary with, and are primarily
related to, the production of new business, have been deferred to the extent
that such costs are deemed recoverable from future revenues. Such estimated
costs include commissions, certain costs of policy issuance, underwriting and
certain variable agency expenses. Costs deferred on accident and sickness and
traditional life policies are amortized, with interest, over the anticipated
premium-paying period of the related policies in proportion to the ratio of
annual premium revenue to expected total premium revenue to be received over
the life of the policies. Expected premium revenue is estimated by using the
same mortality, morbidity and withdrawal assumptions used in computing
liabilities for future policy benefits. For interest sensitive products and
limited pay life products, policy acquisition costs are amortized in relation
to the emergence of anticipated gross profits over the life of the policies.
PRESENT VALUE OF INSURANCE IN FORCE
The present value of insurance in force represents the anticipated gross
profits to be realized from future revenues on insurance in force at the date
such insurance was purchased, discounted to provide an appropriate rate of
return and amortized, with interest based upon the policy liability or contract
rate, over the years that such profits are anticipated to be received in
proportion to the estimated gross profits. Accumulated amortization was
$151,173 and $122,851 as of December 31, 1996 and 1995, respectively.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 11
PAGE 11
Notes to Consolidated Financial Statements, continued
NET INCOME PER COMMON SHARE
Net income per common share is determined after recognition of preferred stock
dividends and accretion of discount on preferred stock and is based on the
weighted average number of common shares outstanding during the year after
giving consideration to the dilutive effect of stock options and stock
warrants. Fully diluted net income per share assumes the conversion of
convertible preferred stock.
The Company adopted the disclosure requirements of SFAS No. 123, "Accounting
for Stock-Based Compensation", in 1996. This statement provides a choice for
the accounting of employee stock compensation plans. A company may elect to use
a new fair-value methodology, under which compensation cost is measured and
recognized in results of operations, or continue to account for these plans
under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees", and related Interpretations. Note 12 of the
Consolidated Financial Statements contains a summary of the pro forma effects
to reported net income applicable to common stock and earnings per share for
1996 and 1995, if the Company had elected to account for employee stock
compensation plans utilizing the fair value methodology prescribed by
SFAS No. 123.
COSTS IN EXCESS OF NET ASSETS ACQUIRED
Costs in excess of the fair value of net assets acquired are amortized on a
straight-line basis primarily over 20 years. Accumulated amortization was
$32,434 and $26,484 as of December 31, 1996 and 1995, respectively.
The Company continually monitors the value of costs in excess of net assets
acquired based upon estimates of future earnings. Any amounts deemed to be
impaired are charged, in the period in which such impairment was determined, as
an expense against earnings. For the periods presented there was no charge to
earnings for the impairment of costs in excess of net assets acquired.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
FOREIGN CURRENCY TRANSLATION
The financial statement accounts of the Canadian operations, which are
denominated in Canadian dollars, are translated into U.S. dollars as follows:
(i) Canadian currency assets and liabilities are translated at the rates of
exchange as of the balance sheet dates and the related unrealized translation
adjustments are included as a separate component of shareholders' equity, and
(ii) revenues, expenses and cash flows, expressed in Canadian dollars, are
translated using a weighted average of exchange rates for each of the periods
presented.
REINSURANCE
Financial reinsurance that does not transfer significant insurance risk is
accounted for as deposits. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the underlying reinsured policies.
Balances due to, or from, reinsurers have been reflected as assets and
liabilities rather than being netted against the related account balances.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(3) ACQUISITIONS
On July 22, 1996, the Company consummated the acquisition of UC Life for a
total purchase price of $110,056 including expenses incurred of $9,706 and
earnings through the date of consummation of the acquisition of $3,608. The
fair value of net assets acquired amounted to $76,008 resulting in $34,048
costs in excess of net assets acquired.
The UC Life acquisition has been accounted for as a purchase transaction in
accordance with generally accepted accounting principles, and accordingly, all
assets and liabilities acquired were recorded at fair value as of the
acquisition date which became the new cost basis.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 12
PAGE 12
Notes to Consolidated Financial Statements, continued
On July 25, 1995, the Company consummated the acquisition of Integon Life for a
total purchase price of $48,596 including acquisition expenses of approximately
$3,200. The fair value of net assets acquired amounted to $2,974 resulting in
$45,622 of costs in excess of net assets acquired.
The acquisition of Integon Life was initiated on January 20, 1995, when the
Company and its subsidiaries entered into a series of related agreements to
acquire all of the issued and outstanding capital stock of Salem Holdings
Corporation (formerly Integon Life Corporation), including the purchase for
$15,000 in cash, of a 49% limited partnership interest in the ultimate limited
partner that controlled Integon Life. Prior to the consummation of the
acquisition, the Company's 49% equity interest in the net income of Integon
Life, which aggregated $3,808, was reported on the equity method of accounting
as undistributed earnings in unconsolidated affiliates for the period from
January 20, 1995, to July 25, 1995.
The Integon Life acquisition has been accounted for as a purchase transaction
in accordance with generally accepted accounting principles, and accordingly,
assets and liabilities acquired have been recorded as a step purchase with fair
values determined as of January 20, 1995 and July 25, 1995, which became the
new cost basis.
On August 31, 1994, the Company consummated the acquisition of AA Life for a
total cash purchase price of $103,392 including acquisition expenses of $1,865.
The fair value of net assets acquired was $86,880 resulting in $16,512 of costs
in excess of net assets acquired.
The AA Life acquisition has been accounted for as a purchase transaction in
accordance with generally accepted accounting principles, and accordingly, all
assets and liabilities acquired were recorded at fair value as of the
acquisition date which became the new cost basis. .
The results of operations of the acquired companies are included in the
accompanying financial statements since the respective acquisition dates.
The following unaudited pro forma data represents the Company's consolidated
results of operations as if (i) the Integon Life and AA Life acquisition
occurred as of January 1, 1994, and (ii) the UC Life acquisition occurred as of
January 1, 1995. This unaudited pro forma data has been prepared for
comparative purposes only and does not purport to be indicative of what would
have occurred had the acquisitions been made as of January 1, 1995 and 1994, or
results which may occur in the future.
<TABLE>
<CAPTION>
(Amounts in thousands, except per share information)
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Total revenues $ 639,076 $ 635,508 $ 484,181
Income before income taxes, undistributed earnings in
unconsolidated affiliates and extraordinary charge 131,683 118,742 51,779
Net income applicable to common stock 82,884 54,077 30,417
Per share information:
Net income applicable to common stock - primary 2.79 1.84 1.21
Net income applicable to common stock - fully diluted 2.59 1.81
</TABLE>
(4) FOREIGN INFORMATION AND BUSINESS SEGMENT INFORMATION
The Company's only reportable industry segment is life insurance, and its only
significant foreign operations are conducted in Canada. Within the life
insurance segment the Company's significant lines of business include fixed
benefit, life and accumulation products. Assets and related investment income
are allocated based upon related insurance liabilities which are backed by such
assets. Other operating expenses are allocated in relation to the mix of
related revenues.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 13
PAGE 13
Notes to Consolidated Financial Statements, continued
The components of operations for the years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
TOTAL REVENUES:
Insurance operations
U.S.
Fixed benefit products $ 147,226 $ 162,747 $ 159,644
Life products 253,959 174,934 91,322
Accumulation products 111,146 32,378 -
Canada
Fixed benefit products 45,695 40,596 37,641
Life products 6,690 6,430 5,618
Non-insurance operations, corporate and eliminations 4,326 535 (453)
--------------------------------------------------
$ 569,042 $ 417,620 $ 293,772
=========================================================================================================
INCOME BEFORE INCOME TAXES, UNDISTRIBUTED EARNINGS
IN UNCONSOLIDATED AFFILIATES AND EXTRAORDINARY
CHARGE:
Insurance operations
U.S.
Fixed benefit products $ 39,664 $ 52,148 $ 18,735
Life products 52,363 26,245 40,908
Accumulation products 33,289 14,423 -
Canada
Fixed benefit products 15,435 15,568 13,007
Life products 642 2,451 1,391
Non-insurance operations, corporate and eliminations (17,694) (20,558) (15,460)
--------------------------------------------------
$ 123,699 $ 90,277 $ 58,581
=========================================================================================================
</TABLE>
Total assets as of December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
=========================================================================================================
<S> <C> <C>
TOTAL ASSETS:
Insurance operations
U.S.
Fixed benefit products $ 479,900 $ 453,087
Life products 1,686,611 1,497,654
Accumulation products 2,349,905 945,100
Canada
Fixed benefit products 139,887 120,011
Life products 43,613 39,357
Non-insurance operations, corporate and eliminations 133,817 94,797
-------------------------------
$ 4,833,733 $ 3,150,006
=========================================================================================================
</TABLE>
(5) INVESTMENTS
The following investments, other than obligations of the U.S. Government or
agencies thereof, individually exceeded 10% of total shareholders' equity as of
December 31:
<TABLE>
<CAPTION>
1996 1995
=========================================================================================================
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Canadian government obligations $ 80,492 $ 88,671 $ 61,245 $ 66,374
=========================================================================================================
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 14
PAGE 14
Notes to Consolidated Financial Statements, continued
The amortized cost and fair value of investments in fixed maturities held for
investment as of December 31 were as follows:
<TABLE>
<CAPTION>
1996
=========================================================================================================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities, principally
obligations of U.S. Government agencies $ 34,546 $ 2,307 $ - $ 36,853
Corporate securities 52,784 124 2 52,906
---------------------------------------------------------
$ 87,330 $ 2,431 $ 2 $ 89,759
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995
=========================================================================================================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate securities $ 51,366 $ - $ 12 $ 51,354
=========================================================================================================
</TABLE>
The amortized cost and fair value of investments in fixed maturities available
for sale as of December 31 were as follows:
<TABLE>
<CAPTION>
1996
=========================================================================================================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities, principally
obligations of U.S. Government agencies $1,408,124 $ 25,710 $ 5,510 $1,428,324
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies 326,484 5,783 2,760 329,507
Debt securities issued by foreign governments 80,492 8,179 - 88,671
Corporate securities 1,126,650 29,940 9,167 1,147,423
---------------------------------------------------------
$2,941,750 $ 69,612 $ 17,437 $2,993,925
=========================================================================================================
</TABLE>
<TABLE>
1995
=========================================================================================================
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities, principally
obligations of U.S. Government agencies $ 484,945 $ 23,288 $ 1,880 $ 506,353
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies 363,305 18,207 980 380,532
Debt securities issued by foreign governments 61,245 5,210 81 66,374
Corporate securities 504,692 33,486 4,452 533,726
---------------------------------------------------------
$1,414,187 $ 80,191 $ 7,393 $1,486,985
=========================================================================================================
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 15
PAGE 15
Notes to Consolidated Financial Statements, continued
The amortized cost and fair value of fixed maturities held for investment as of
December 31, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
=========================================================================================================
<S> <C> <C>
Due in one year or less $ 5,223 $ 5,223
Due after 1 through 5 years 16,793 16,854
Due after 5 through 10 years 30,768 30,829
Mortgage-backed securities, principally
obligations of U.S. Government agencies 34,546 36,853
-------------------------------
$ 87,330 $ 89,759
=========================================================================================================
</TABLE>
The amortized cost and fair value of fixed maturities available for sale as of
December 31, 1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
=========================================================================================================
<S> <C> <C>
Due in one year or less $ 126,527 $ 127,588
Due after 1 through 5 years 340,267 348,026
Due after 5 through 10 years 781,999 798,307
Due after 10 years 284,833 291,680
Mortgage-backed securities, principally
obligations of U.S. Government agencies 1,408,124 1,428,324
-------------------------------
$ 2,941,750 $ 2,993,925
=========================================================================================================
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
Included in fixed maturities held for investment as of December 31, 1996 and
1995, are below investment-grade securities with an amortized cost and fair
value of $34,624 and $39,281, respectively. Included in fixed maturities held
for investment as of December 31, 1996, are unrated securities with an
amortized cost of $46,413 and a fair value of $48,831.
Included in fixed maturities available for sale as of December 31, 1996 and
1995, are below investment-grade securities with an amortized cost of $91,590
and $30,556 and a fair value of $92,494 and $33,541, respectively. Included in
fixed maturities available for sale as of December 31, 1996, are unrated
securities with an amortized cost of $92,315 and a fair value of $92,752.
As of December 31, 1996, net unrealized appreciation in equity securities
available for sale of $3,356 consisted of gross unrealized gains of $4,047,
less gross unrealized losses of $691. As of December 31, 1995, net unrealized
appreciation in equity securities available for sale of $1,465 consisted of
gross unrealized gains of $2,031, less gross unrealized losses of $566.
Fair values for fixed maturity securities were provided by independent pricing
services using market quotations, prices provided by market makers, or
estimates of fair values obtained from yield data relating to investment
securities with similar characteristics. The fair values for equity securities
were determined using market quotations from principal public exchange markets.
The Company's commercial and residential mortgage portfolios had carrying
values $256,998 and $36,563, respectively, and, fair values of approximately
$261,408 and $37,190, respectively, as of December 31, 1996 and 1995. The fair
values for mortgage loans on real estate are estimated using the quoted market
prices for securities collateralized by similar mortgage loans, adjusted for
the differences in loan characteristics. For mortgage loans on real estate
where quoted market prices are not available, the fair values are estimated
using discounted cash flow analysis and interest rates for loans with similar
credit ratings.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 16
PAGE 16
Notes to Consolidated Financial Statements, continued
As of December 31, 1996, commercial and residential mortgage loan investments
were concentrated in the following states:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
CARRYING VALUE CARRYING VALUE
=========================================================================================
<S> <C> <C>
Georgia $ 42,412 16.5%
Florida 40,234 15.7
Colorado 31,434 12.3
Virginia 17,892 6.7
Tennessee 15,828 6.2
Alabama 15,142 5.9
Louisiana 13,912 5.5
All other 80,144 31.2
-----------------------
$256,998 100.0%
=========================================================================================
</TABLE>
Investments with a carrying value of $62,767 and $49,036 were on deposit with
certain regulatory authorities as of December 31, 1996 and 1995, respectively.
Realized, and changes in unrealized gains and losses, on investments for the
years ended December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
==========================================================================================================
<S> <C> <C> <C>
REALIZED GAINS (LOSSES) ON DISPOSITIONS OF INVESTMENTS:
Securities held for investment:
Gross gains from sales $ - $ - $ -
Gross losses from sales (28) - -
Net gains (losses) from redemptions (105) 1 (2,186)
- ----------------------------------------------------------------------------------------------------------
(133) 1 (2,186)
Securities available for sale:
Gross gains from sales 2,562 3,009 182
Gross losses from sales (1,800) (2,616) (1,572)
Net gains (losses) from redemptions (166) 201 20
- ----------------------------------------------------------------------------------------------------------
596 594 (1,370)
Mortgage loans 794 - -
Net realized gains (losses) $ 1,257 $ 595 $ (3,556)
==========================================================================================================
CHANGES IN UNREALIZED GAINS (LOSSES):
Securities held for investment $ 2,441 $ 3,575 $ (9,639)
Securities available for sale (18,732) 111,732 (52,408)
- ----------------------------------------------------------------------------------------------------------
Net change in unrealized gains (losses) $ (16,291) $ 115,307 $ (62,047)
==========================================================================================================
TRADING PORTFOLIO:
Net gains from sales $ 4,930 $ 1,830
Net change in unrealized gains (losses) (3,626) 3,880
- -------------------------------------------------------------------------------------
Total trading gains $ 1,304 $ 5,710
=====================================================================================
</TABLE>
Major categories of net investment income for the years ended December 31,
consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
==========================================================================================================
<S> <C> <C> <C>
Fixed maturity securities $ 170,871 $ 70,715 $ 44,759
Mortgage loans on real estate 13,693 2,783 1,702
Policy loans 8,409 5,240 2,725
Short term investments 12,966 16,891 1,641
Other investments 13,100 10,168 2,291
- ----------------------------------------------------------------------------------------------------------
Gross investment income 219,039 105,797 53,118
Less: investment expenses 5,476 3,506 1,268
- ----------------------------------------------------------------------------------------------------------
Net investment income $ 213,563 $ 102,291 $ 51,850
==========================================================================================================
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 17
PAGE 17
Notes to Consolidated Financial Statements, continued
The Company had non-income producing fixed maturity investments with an
amortized cost of $17,115 and $10,184 as of December 31, 1996 and 1995,
respectively.
(6) SOUTHWESTERN LIFE INVESTMENT
On December 14, 1995, Southwestern Financial Corporation ("SW Financial"), a
newly organized corporation formed by the Company and Knightsbridge Capital
Fund I, L.P. ("Knightsbridge", see Notes 15 and 16) purchased Southwestern Life
Insurance Company, Union Bankers Insurance Company and certain other related
assets from I.C.H. Corporation for $260,000.
Through its direct investment of $120,000 in SW Financial (the "Southwestern
Life Investment"), the Company beneficially owns 75.4% of SW Financial's
outstanding common stock, including 100% of SW Financial's non-voting common
stock, 21.0% of SW Financial's voting common stock, and preferred stock of SW
Financial. PennCorp is also a 16.3% limited partner in Knightsbridge.
As part of the SW Financial investment, PennCorp, the Knightsbridge Fund and its
affiliates and SW Financial entered into a 10-year stockholders agreement. The
agreement includes customary provisions for corporate governance (including the
right to elect or appoint members of the Board of Directors of SW Financial),
"drag-along" and "tag-along" rights and "demand" and "piggy-back" registration
rights. In addition, each issuance of preferred stock of SW Financial and its
subsidiaries held by PennCorp allows for class voting rights under certain
circumstances.
The consolidated condensed results of operations and financial position of SW
Financial are provided below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE PERIOD
DECEMBER 31,1996 DECEMBER 14-31, 1995
====================================================================================================================
<S> <C> <C>
REVENUES:
Policy revenues $ 196,912 $ 12,668
Net investment income 128,972 6,015
Other income (including limited partnership distributions of 15,811 in 1996) 27,439 320
Net gains from the sale of investments 516 --
-------------------------
Total revenues 353,839 19,003
-------------------------
BENEFITS AND EXPENSES:
Claims incurred 234,773 14,736
Change in liability for future policy benefits and
other policy benefits (36,929) (2,318)
Insurance and other operating expenses 92,731 3,617
Interest and amortization of deferred debt issuance costs 14,052 664
-------------------------
Total benefits and expenses 304,627 16,699
-------------------------
Income before income taxes and extraordinary charge 49,212 2,304
Income taxes 18,247 882
-------------------------
Net income 30,965 1,422
Preferred stock dividend requirements 2,754 205
-------------------------
Net income applicable to common stock $ 28,211 $ 1,217
==========================
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 1995
=========================================================================================================
<S> <C> <C>
ASSETS:
Invested assets $ 1,640,991 $ 1,710,537
Insurance assets 107,230 115,831
Other assets 462,329 387,656
-------------------------------
Total assets $ 2,210,550 $ 2,214,024
===============================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Insurance liabilities $ 1,745,160 $ 1,821,292
Long-term debt 159,750 160,000
Other liabilities 127,237 74,826
Redeemable preferred stock 33,879 31,099
Shareholders' equity 144,524 126,807
-------------------------------
Total liabilities and shareholders' equity $ 2,210,550 $ 2,214,024
===============================
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 18
PAGE 18
Notes to Consolidated Financial Statements, continued
(7) DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN FORCE
Deferred policy acquisition costs represent commissions, certain costs of
policy issuance, including underwriting and certain variable agency costs.
Information relating to these costs for the years ended December 31, is as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
=======================================================================================================
<S> <C> <C> <C>
Policy acquisition costs deferred:
Commissions $ 48,502 $ 49,191 $ 31,591
Underwriting and issue costs 51,043 34,604 27,328
-----------------------------------------------
99,545 83,795 58,919
Policy acquisition costs amortized (24,556) (22,234) (11,141)
Unrealized investment loss adjustment (461) (1,007) -
Foreign currency translation adjustment (75) 486 (751)
-----------------------------------------------
Balance as of December 31 $ 268,356 $ 193,903 $ 132,863
=======================================================================================================
</TABLE>
As a part of the purchase accounting for the Company's acquisitions, a present
value of insurance in force asset is established which represents the value of
the right to receive future cash flows from insurance contracts existing at the
date of acquisition. Such value is the actuarially determined present value of
the projected cash flows from the acquired policies, discounted at an
appropriate risk rate of return.
The methods used by the Company to value the fixed benefit, life, and
accumulation products purchased are consistent with the valuation methods used
most commonly to value blocks of insurance business. It is also consistent with
the basic methodology generally used to value insurance assets. The method used
by the Company includes identifying the future cash flows from the acquired
business, the risks inherent in realizing those cash flows, the rate of return
the Company believes it must earn in order to accept the risks inherent in
realizing the cash flows, and determining the value of the insurance asset by
discounting the expected future cash flows by the discount rate the Company
requires.
The discount rate used to determine such values is the rate of return required
in order to invest in the business being acquired. In selecting the rate of
return, the Company considered the magnitude of the risks associated with the
type of business acquired and actuarial factors described in the following
paragraph, cost of capital available to the Company to fund the acquisition,
compatibility with other Company activities that may favorably affect future
profits, and the complexity of the acquired company.
Expected future cash flows used in determining such values are based on
actuarial determinations of future premium collection, mortality, morbidity,
surrenders, operating expenses and yields on assets held to back policy
liabilities as well as other factors. Variances from original projections,
whether positive or negative, are included in income as they occur and will
affect the present value of insurance in force interest rates for products
subject to SFAS No. 97. To the extent that these variances indicate that future
cash flows will differ from those included in the original scheduled
amortization of the present value of the insurance in force, future
amortization may be adjusted. Recoverability of the present value of insurance
in force is evaluated annually and appropriate adjustments are then determined
and reflected in the financial statements for the applicable period.
Information related to the present value of insurance in force is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Balance as of January 1 $ 288,664 $ 208,233 $ 172,887
Addition due to acquisition 79,077 132,949 56,000
Accretion of interest 27,530 22,135 16,853
Amortization (55,851) (47,633) (36,661)
Unrealized investment gain (loss) adjustment 12,582 (27,425) -
Foreign currency translation adjustment (29) 405 (846)
--------------------------------------------------
Balance as of December 31 $ 351,973 $ 288,664 $ 208,233
=========================================================================================================
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 19
PAGE 19
Notes to Consolidated Financial Statements, continued
Expected gross amortization, based upon current assumptions and accretion of
interest at a policy liability or contract rate ranging from 3.5% to 14.5%, for
the next five years of the present value of insurance in force is as follows:
<TABLE>
<CAPTION>
BEGINNING GROSS ACCRETION NET
BALANCE AMORTIZATION OF INTEREST AMORTIZATION
=========================================================================================================
<C> <C> <C> <C> <C>
1997 $ 351,973 $ 63,796 $ 25,354 $ 38,442
1998 313,531 55,640 22,937 32,703
1999 280,828 50,205 20,674 29,531
2000 251,297 45,077 18,622 26,455
2001 224,842 39,166 16,746 22,420
</TABLE>
(8) FUTURE POLICY BENEFITS
The liability for future policy benefits consists of reserves for fixed
benefit, life and accumulation products. For interest sensitive life products
and annuity products, the liability for future policy benefits is equal to the
accumulated fund value. Fund values are equal to the excess premium received
and interest credited to the fund value less deductions for mortality costs and
expense charges. Current declared interest rates credited range from 4.0% to
6.75 percent. Mortality costs and expense charges are established by the
Company based upon its experience and cost structure.
For traditional life products, the liability for future policy benefits is
based primarily upon Commissioners' Standard Ordinary Tables with interest
rates ranging from 2.5% to 6.0 percent. Fixed products establish a liability
for future policy benefits equal to the excess of the present value of future
benefits to or on behalf of the policyholder over the future net premium
discounted at interest rates ranging primarily from 4.5% to 8.0 percent.
Traditional life products' and fixed benefit products' future policy benefits
are determined using Company experience as to mortality, morbidity and lapses
with a provision for adverse deviation. The Company may vary assumptions by
year of policy issue.
The following table presents information on changes in the liability for
accident and sickness claims for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Claim liability at January 1 $ 127,078 $ 126,920 $ 136,043
Less reinsurance recoverables 1,372 2,050 2,750
--------------------------------------------------
Net balance at January 1 125,706 124,870 133,293
--------------------------------------------------
Addition due to acquisition 1,079 1,095 -
--------------------------------------------------
Add claims incurred during the year related to:
Current year 63,673 62,106 76,686
Prior years (6,816) (2,855) (579)
--------------------------------------------------
Total incurred 56,857 59,251 76,107
--------------------------------------------------
Less claims paid during the year related to:
Current year 19,057 20,346 32,828
Prior years 36,435 39,164 51,702
--------------------------------------------------
Total paid 55,492 59,510 84,530
--------------------------------------------------
Net balance at December 31 128,150 125,706 124,870
Plus reinsurance recoverables 2,242 1,372 2,050
--------------------------------------------------
Claim liability at December 31* $ 130,392 $ 127,078 $ 126,920
=========================================================================================================
</TABLE>
* Included in the balance sheet captions "future policy benefits" and "policy
and contract claims".
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 20
PAGE 20
Notes to Consolidated Financial Statements, continued
(9) NOTES PAYABLE
The outstanding principal amounts of the notes payable consist of the following
as of December 31:
<TABLE>
<CAPTION>
1996 1995
=========================================================================================================
<S> <C> <C>
Unsecured 9 1/4% Senior Subordinated Notes due 2003 (a) $ 114,646 $ 150,000
Bank Debt due in 1996 (b) - 100,000
Bank Debt with annual principal requirement (c) - 57,000
Revolving bank credit facility (d) 92,000 -
Unsecured 9% Notes payable due December 31, 1996 - 271
Other 3,679 -
-------------------------------
$ 210,325 $ 307,271
=========================================================================================================
</TABLE>
(a) Interest costs under the Notes totaled $13,545, $14,463 and $15,206 during
1996, 1995 and 1994, respectively. At December 31, 1996, the effective rate for
the Notes was approximately 9.6 percent.
(b) Interest costs under the $100,000 credit facility totaled $1,701 and
$362 in 1996 and 1995, respectively. The effective rate of interest charged on
amounts outstanding during 1996 was 7.2 percent.
(c) Interest costs under the $57,000 in bank debt totaled $836 and $3,839 in
1996 and 1995, respectively. The effective rate of interest charged on amounts
outstanding during 1996 was 8.1 percent.
(d) Interest costs under the $175,000 revolving credit facility totaled $1,558
in 1996. The effective rate of interest charged was 6.0% during 1996 on a
weighted average outstanding balance of $25,861.
The fair value of amounts outstanding as notes payable for the years ended
December 31, 1996 and 1995, amounted to $215,341 and $311,771, respectively.
All recorded amounts other than the Senior Subordinated Notes approximate
market as they carry variable rates of interest which adjust at least every 90
days. The fair value of the Senior Subordinated Notes is determined based upon
quotes from market makers.
The aggregate maturities of notes payable during each of the five years after
December 31, 1996, are as follows: 1997, $570; 1998, $617; 1999, $668; 2000,
$724; 2001, $92,951.
All of the Company's debt obligations contain financial and operating
covenants. The Company and its subsidiaries were in compliance with all
applicable covenants as of December 31, 1996.
The Company realized an after-tax extraordinary charge of $2,372 for the year
ended December 31, 1996. The charge represents (i) the write-off of $816 of
deferred financing costs related to the retirement of certain indebtedness of
the Company and its subsidiaries, and (ii) the write-off of $1,556 of deferred
financing, swap cancellation and other costs related to the repurchase of
approximately $35,354 in principal amount of the Senior Subordinated Notes.
(10) INCOME TAXES
The Company and a number of its non-insurance subsidiaries file a consolidated
federal income tax return with a July 31 year end, which differs from its
financial year end. Marketing One and its subsidiaries file a consolidated
federal income tax return with a December 31 year end. The AA Life, PLAIC, and
Salem Life groups each file a consolidated federal life insurance company
income tax return on a calendar year basis with their life insurance
subsidiaries.
Total income taxes for the years December 31, 1996, 1995, and 1994 were
allocated as follows:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Income from operations $ 45,418 $ 31,642 $ 21,437
Extraordinary item (1,277) - -
Shareholders' equity (1,864) 28,493 (13,015)
--------------------------------------------------
$ 42,277 $ 60,135 $ 8,422
=========================================================================================================
</TABLE>
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 21
PAGE 21
Notes to Consolidated Financial Statements, continued
The provisions for income tax expense (benefit) attributable to income before
extraordinary charge for the years ended December 31, 1996, 1995 and 1994, are
as follows:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Current U.S. $ (1,285) $ (1,311) $ 1,174
Current foreign 2,319 4,519 2,210
Deferred U.S. 39,943 26,329 17,310
Deferred foreign 4,441 2,105 661
Charge in lieu of tax - - 82
--------------------------------------------------
Income tax expense $ 45,418 $ 31,642 $ 21,437
=========================================================================================================
</TABLE>
Taxes computed using the federal statutory rate of 35% in 1996, 1995 and 1994,
are reconciled to the Company's actual income tax expense attributable to
income before extraordinary charge as follows:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Tax expense computed at statutory rate $ 43,294 $ 31,597 $ 20,504
Dividends received deduction (860) (85) (8)
Amortization of costs in excess of net assets acquired 2,796 2,295 1,834
Change in valuation allowance (1,265) (5,102) (2,388)
Foreign taxes net of U.S. tax benefit 1,507 2,937 1,413
Other (54) - 82
--------------------------------------------------
Income tax expense $ 45,418 $ 31,642 $ 21,437
=========================================================================================================
</TABLE>
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to the deferred tax liabilities
at December 31, 1996 and 1995, relate to the following:
<TABLE>
<CAPTION>
1996 1995
==========================================================================================================
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSETS LIABILITIES ASSETS LIABILITIES
---------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred policy acquisition costs $ - $ 72,676 $ - $ 47,635
Present value of insurance and force - 95,252 - 99,905
Future policy benefits 65,999 - 85,266 -
Net operating losses 38,557 - 35,524 -
Foreign and alternative minimum tax credits 21,252 - 16,030 -
Unrealized gain on investment securities - 13,650 - 15,478
Other 23,048 14,830 35,545 19,801
---------------------------------------------------------
148,856 196,408 172,365 182,819
Valuation allowance (15,892) - (17,157) -
---------------------------------------------------------
$ 132,964 $ 196,408 $ 155,208 $ 182,819
=========================================================================================================
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1996 and 1995
was $17,157 and $17,261, respectively. The net change in the total valuation
allowance for the years ended December 31, 1996 and 1995, was a decrease of
$1,265 and of $104, respectively. If recognized as a tax benefit, a portion of
the valuation allowance totaling $7,349 would be allocated to reduce costs in
excess of net assets acquired.
In assessing the realization of deferred taxes, management considers whether it
is more likely than not that some portion or all of the deferred tax assets
will be realized. The ultimate realization of deferred tax assets is dependent
on the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. Based upon those considerations,
management believes it is more likely than not that the Company will realize
the benefits of these deductible differences, net of the existing valuation
allowance at December 31, 1996.
At December 31, 1996, the Company has life consolidated net operating loss
carryforwards of approximately $100,009 for tax return purposes. In addition,
OLIC and Peninsular have available, on a separate return basis, acquired net
operating loss
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 22
PAGE 22
Notes to Consolidated Financial Statements, continued
carryforwards of approximately $10,153. The utilization of acquired net
operating loss carryforwards is limited in any one year to the lesser of (i)
the life insurance group's consolidated taxable income or (ii) the subsidiary's
taxable income computed on a separate return basis.
The approximate net operating loss carryforwards for income tax purposes expire
as follows:
<TABLE>
<CAPTION>
LIFE LIFE
CONSOLIDATED SEPARATE
EXPIRATION DATE RETURN RETURN
=========================================================================================================
<C> <C> <C>
2004 $ - $ 5,072
2005 533 4,981
2006 - -
2007 15,967 -
2008 38,047 100
2009 9,985 -
2010 - -
2011 35,477 -
-------------------------------
$ 100,009 $ 10,153
=========================================================================================================
</TABLE>
Under provisions of the Life Insurance Company Tax Act of 1959, certain special
deductions were allowed to life insurance companies for federal income tax
purposes. These special deductions were repealed by the Tax Reform Act of 1984,
and the untaxed balances were frozen at their December 31, 1983 levels. These
balances, aggregate approximately $42,301 for the Company's life insurance
subsidiaries, and are subject to taxation if certain levels of premium income
or life insurance reserves are not maintained, or if the life insurance
companies make excess distributions to shareholders. It is not expected that a
tax would become due on any such balance and no deferred income taxes have been
provided. However, if such tax were to become payable, it would amount to
approximately $14,805.
(11) PREFERRED STOCK
The Company issued 2,875,000 shares of $50 redemption value $3.50 Series II
Convertible Preferred Stock (the "Series II Convertible Preferred Stock") on
August 2, 1996. The Series II Convertible Preferred Stock is convertible at the
option of the holder, unless previously redeemed, into 1.4327 shares of common
stock for each share, subject to adjustment in certain events. Dividends
accrued and unpaid as of December 31, 1996, were $1,677. The carrying value of
the Series II Convertible Preferred Stock approximates market due to the
short-term nature of the instrument.
On July 25, 1995, the Company issued 127,500 shares of 10% Series B Preferred
Stock and 178,500 shares of 9% Series C Preferred Stock to fund a portion of
the Integon Life purchase price. The Series B Preferred Stock and the Series C
Preferred Stock are mandatorily redeemable on or before June 30, 1997 and June
30, 1998, respectively. The redemption price of the Series C Preferred Stock is
subject to certain offsets related to the Integon Life stock purchase
agreement. Dividends accrued and unpaid were $1,939 and $557 on the Series B
Preferred Stock and $2,175 and $700 on the Series C Preferred Stock,
respectively, as of December 31, 1996 and 1995.
The Company issued 2,300,000 shares of $50 redemption value $3.375 Convertible
Preferred Stock (the "Convertible Preferred Stock") on July 14, 1995. The
Convertible Preferred Stock is convertible at the option of the holder, unless
previously redeemed, into 2.2124 shares of common stock for each share, subject
to adjustment in certain events. Dividends accrued and unpaid as of December
31, 1996 and 1995 were $1,660. The carrying value of the Convertible Preferred
Stock approximates market due to the short-term nature of the instrument.
In conjunction with the acquisition of AA Life in August 1994, the Company
issued 450,000 shares of nonvoting Series A Preferred Stock, $0.01 per share
par value and $100 per share redemption value. The Series A Preferred Stock was
redeemed on August 25, 1995, from the proceeds received from the issuance of
the Convertible Preferred Stock. During 1995, and 1994, the Company paid or
accrued dividends amounting to $1,725 and $1,151, respectively.
(12) STOCK OPTIONS AND WARRANTS
The Company has established two management stock option plans, the 1992 Stock
Option Plan which set aside up to 475,635 shares for grant and the 1996 Stock
Option Plan which set aside up to 2,800,000 shares for grant. Options granted
under the 1992 Stock Option Plan are deemed to be in four equal units which are
earned over four years from the
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 23
PAGE 23
Notes to Consolidated Financial Statements, continued
date of grant and are exercisable during a one-year period immediately
following the fourth anniversary of the date of grant. The 1996 Stock Option
Plan allows for awards of stock or options subject to such terms, conditions,
and restrictions, and/or limitations, if any, as the Stock Option Committee of
the Board of Directors deems appropriate.
The Company has also established a senior management stock award plan ("Warrant
Plan"). The Warrant Plan allows for grants to senior executive officers of
PennCorp and Directors of PennCorp who are not executive officers of the
Company. Grant prices are determined based on the average price of the shares
traded on the date of grant. Warrants granted under the Warrant Plan are
determined by the Compensation Committee and are exercisable at such times and
in such amounts as the Compensation Committee shall determine, but no warrant
granted under the Warrant Plan will be exercisable more than ten years after
the date of grant. Upon change of control (as defined) of PennCorp, all
outstanding warrants become immediately vested and exercisable, and any
warrants that remain unexercised shall be canceled and replacement warrants
shall be issued by the surviving entity.
As part of an employment agreement effective August 1990, the Company issued to
a former officer of the Company, warrants to purchase up to 570,760 shares of
the common stock of the Company at any time up to 10 years from the date of the
agreement. The warrants are exercisable at a price of $4.00 per share which was
fair value on the date of grant.
The Company has established a U.S. Sales Manager incentive stock option plan in
which the senior sales manager of one of the Company's insurance subsidiaries
may earn stock options in the amount of 275,000 shares over a five-year period,
subject to achieving certain performance goals, in addition to an initial grant
of 100,000 options. Such options are vested immediately as earned, except for
the initial 100,000 which vest in September 1999, and option prices range from
$15 per share, for the initial 100,000 options, to the fair value of the common
stock of the Company on the date of grant for those shares subject to
performance goals.
The following table summarizes data relating to stock options and warrants
activity and associated weighted average option exercise price information for
the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Number of shares subject to option/warrant:
Outstanding at beginning of year 2,329,754 $ 10.86 2,261,981 $ 9.61 2,221,034 $ 8.78
Granted 44,000 $ 31.09 110,000 $ 17.64 137,000 $ 15.84
Expired/canceled (59,000) $ 13.82 (42,227) $ 13.43 (96,053) $ 13.24
Exercised (147,867) $ 5.40 --- $ --- --- $ ---
------------------------------------------------------------------
Outstanding at end of year 2,166,887 $ 11.56 2,329,754 $ 10.86 2,261,981 $ 9.61
================================================================================================================
Exercisable at end of year 2,105,438 $ 11.00 --- $ --- --- $ ---
================================================================================================================
Available for future grant at end of year 2,792,000 144,063 262,024
================================================================================================================
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options and warrants as of December 31, 1996:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
OPTIONS/WARRANTS OUTSTANDING OPTIONS/WARRANTS EXERCISABLE
-------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
RANGE OF NUMBER AVERAGE REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
==========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
$4.00 - $5.40 893,887 5.8 4.51 893,887 4.51
$14.00 - $19.58 1,229,000 6.2 15.96 1,211,551 15.78
$27.25 - $32.43 44,000 8.4 31.70 --- ---
- ----------------------------------------------------------------------------------------------------------
2,166,887 2,105,438
==========================================================================================================
</TABLE>
In accordance with the provisions of SFAS No. 123, the Company applies APB
Opinion 25 and related Interpretations in accounting for its stock option and
warrant plans and, accordingly, does not recognize compensation cost. If the
Company had elected to recognize compensation cost based on the fair value of
the options and warrants as of the grant date as prescribed by SFAS No. 123,
the reduction in net income applicable to common stock and earnings per share
would have been immaterial.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 24
PAGE 24
Notes to Consolidated Financial Statements, continued
(13) STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
Cash generated by the Company's insurance subsidiaries is made available to
PennCorp principally through periodic payments of principal and interest on
surplus debentures issued by PLAIC, Salem Life and Pioneer Security,
(collectively, the "Surplus Note Companies"). The amounts outstanding under the
surplus debentures totalled $367.9 million and $315.8 million as of December
31, 1996 and 1995, respectively. Surplus debentures generally require (subject
to availability of statutory capital and surplus and in some instances,
regulatory approval) principal and interest payments to be made periodically in
amounts sufficient to allow PennCorp to meet its cash requirements.
The Company's cash flow is derived principally from dividends and principal and
interest payments on the surplus debentures issued by the insurance
subsidiaries.
Dividend payments of the Company's insurance subsidiaries are limited by, or
subject to the approval of the insurance regulatory authority of each
subsidiary's state of domicile. Such dividend requirements and approval
processes vary significantly from state to state. In 1997, the insurance
subsidiaries will be able to pay a maximum of $27,165 in dividends to the
Company without prior regulatory approval. In 1997, the insurance subsidiaries,
subject to availability of cash and statutory capital and surplus, could pay a
maximum of $50,730 on surplus note payments to the Company.
Statutory capital and surplus of the Company's life insurance subsidiaries as
reported to regulatory authorities at December 31, 1996 and 1995, totaled
$305,126 and $167,753, respectively. Shareholders' equity of the Company's life
insurance subsidiaries included in the consolidated balance sheet totaled
$592,304 and $410,228 at December 31, 1996 and 1995, respectively. Statutory
net income (loss) of the Company's life insurance subsidiaries as reported to
regulatory authorities totaled $(21,330), $18,581 and $20,156 for the years
ended December 31, 1996, 1995 and 1994, respectively. Surplus note interest
expense of $51,254, $24,170 and $11,527 for the years ended December 31, 1996,
1995, and 1994, respectively, is included in statutory net income (loss).
The Company's Canadian branch and Canadian subsidiary report to Canadian
regulatory authorities based upon Canadian statutory accounting principles that
vary in some respects from U.S. statutory accounting principles. Consolidated
Canadian net assets based upon Canadian statutory accounting principles were
$51,567 and $43,186 as of December 31, 1996 and 1995, respectively.
Remittances to PLIC from the Canadian operations totaled $-, $2,485 and $5,761
for the years ended December 31, 1996, 1995 and 1994, respectively.
(14) RETIREMENT AND PROFIT SHARING PLANS
On October 1, 1990, the Company established a defined contribution retirement
plan (the "Defined Contribution Plan") for all employees of the Company who
have attained age 21, and for certain agents whose commission earnings
represent more than 50% of their income from the Company. Contributions to the
Defined Contribution Plan are made pursuant to salary deferral elections by
participants in an amount equal to 1% to 15% of their annual compensation. In
addition, the Company makes matching contributions in an amount equal to 50% of
each participant's salary deferral to a maximum of 3% of annual compensation.
The Defined Contribution Plan also provides for a discretionary employer profit
sharing contribution, which is determined annually by the Board of Directors
for the succeeding plan year. Profit sharing contributions are credited to
participant's accounts on the basis of their respective compensation in
accordance with a formula that provides a higher percentage contribution for
compensation in excess of the federal Social Security wage base. Salary
deferral contribution accounts are at all times fully vested, while matching
contribution accounts vest ratably from one to two years of service, and profit
sharing contribution accounts vest ratably from one to five years of service.
All participant accounts are fully vested at death, disability or attainment of
age 65. Payment of vested benefits under the Defined Contribution Plan may be
elected by a participant in a variety of forms of payment. The Company's
funding policy is to contribute annually an amount that can be deducted for
federal income tax purposes. Expenses related to this plan for the years ended
December 31, 1996, 1995 and 1994, amounted to $1,520, $1,335 and $1,105,
respectively.
The Company has an established bonus plan for insurance subsidiary officers.
The amount available to pay awards for any year is determined by a committee of
senior executives of the Company and is subject to the review and
recommendation of the Compensation Committee and approval of the Board of
Directors of the Company. Awards are based primarily on the income growth of
the Company and the performance of eligible participants. The Company accrued
or paid $1,144, $691 and $180 under this plan during the years ended December
31, 1996, 1995 and 1994, respectively.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 25
PAGE 25
Notes to Consolidated Financial Statements, continued
If the Company meets established performance goals, the Company's two most
senior officers are eligible to receive annual cash bonuses based primarily on
annual growth rates in fully diluted earning per share. Bonus awards range from
0% to 200% of a predetermined target annually. During 1996, the Company did not
accrue for such bonuses as the employment arrangements containing the bonus
plan are contingent upon the purchase by the Company of the Fickes and Stone
Knightsbridge Interests (see Notes 15 and 16 below).
Prior to its acquisition by the Company, Integon provided postretirement life
and health benefits for employees who retired at age 55 or later and agents who
retired at age 65 or later with 10 or more years of service. A closed group of
agent retirees under age 65 was also eligible for benefits. Spouses, surviving
spouses and dependent children were eligible for life and health benefits.
Retired employees under age 65 are covered by a health maintenance organization
under which benefits are generally paid at 100% after various copayments.
Retired agents or employees outside the service area are covered by a
self-funded indemnity plan which has a deductible with 20%-30% coinsurance.
Retirees contribute toward their own benefits and contributions are required
for spouses and dependent children. Under the plan, health benefits for
retirees are the same as before retirement, except amounts paid by Medicare are
excluded from consideration.
The plan was terminated as of the date of acquisition.
Postretirement benefits are accrued (but not funded) for eligible retirees. The
components of the accumulated postretirement benefit obligation as of December
31 were as follows:
<TABLE>
<CAPTION>
1996 1995
=========================================================================================================
<S> <C> <C>
Retirees $ 5,279 $ 5,253
Fully eligible active plan participants - 1,778
Other active plan participants - 658
-------------------------------
Accrued postretirement benefit obligation $ 5,279 $ 7,689
=========================================================================================================
</TABLE>
For the year ended December 31, 1996, the postretirement benefit liability was
calculated assuming an annual trend rate in health care inflation of 8% in 1997
grading down to 5.5% in 2000 and after. If the health care cost trend rate
assumption increased by 1%, the accumulated postretirement benefit obligation
as of December 31, 1996, would increase $198 or 3.8%.
(15) RELATED PARTY TRANSACTIONS
During 1995, two of the Company's officers and directors, Messrs. Stone and
Fickes, formed a fund, Knightsbridge Capital Fund I, L.P., ("Knightsbridge")
for the purpose of making equity and equity linked investments in companies
engaged primarily in the life insurance industry. Knightsbridge has received
subscriptions for approximately $92,000 in limited partnership interests,
including a $15,000 subscription from the Company. The general partner of
Knightsbridge is Knightsbridge Capital L.L.C. ("Knightsbridge Capital"), the
members of which are David J. Stone and Steven W. Fickes. Allan D. Greenberg,
a member of the Company's Board of Directors, formerly owned a 5% interest in
Knightsbridge Capital which was purchased by Messrs. Stone and Fickes. The
general partner of Knightsbridge cannot be removed by the limited partners,
unless a court has finally determined that the general partner has committed a
willful and material breach of the limited partnership agreement. However, the
agreement provides that if either Mr. Stone or Mr. Fickes, or both, ceases to
be a member of Knightsbridge Capital or otherwise actively involved in the
management and operations of Knightsbridge, Knightsbridge may not subsequently
call additional capital from the limited partners. However, the limited
partners have consented to the Company's proposed acquisition of Messrs.
Stone's and Fickes' interests in Knightsbridge Capital.
In the second half of 1995, the Company and Knightsbridge determined that a
joint venture strategy was in the best interest of both parties. As part of
that joint venture, Knightsbridge provides PennCorp with a right of first
refusal with respect to all insurance transactions considered by Knightsbridge.
The joint venture entity formed for this purpose is Knightsbridge Management,
L.L.C. ("KM"). PennCorp participates in 45% of the net distributable income of
KM.
The Company has established an independent committee of the Board of Directors
to oversee the relationship between PennCorp and Knightsbridge. KM has the
primary responsibility for negotiating the terms of, and arranging the
financing for PennCorp or PennCorp/Knightsbridge shared transactions. Certain
of those individuals involved in the daily operations of KM are also officers
of the Company.
KM receives management fees from all of its limited partners, including the
Company, for the management of Knightsbridge. KM also receives payment in kind
consideration in lieu of additional management fees from PennCorp for providing
corporate and financial management services to the Company. Fees received by KM
from the Knightsbridge limited partners including PennCorp, as well as the
management fees paid in kind by the Company are subject to offset in future
periods based upon a portion of transaction fees generated by KM.
In February 1996, the PennCorp Board of Directors (the "PennCorp Board") and the
principals of Knightsbridge began discussions on consolidating Messrs. Stone's
and Fickes' outside interests under PennCorp. Such discussions culminated in a
restructuring of the Knightsbridge relationship including the following
completed and pending transactions (see Note 16) (i) Messrs. Stone and Fickes
entered into five-year employment agreements, (ii) the proposed acquisition of
the Fickes and Stone Knightsbridge Interests, (iii) the proposed acquisition of
the Fickes and Stone interests in SW Financial, subject to certain
contingencies, and (iv) the purchase by the Company, from the limited partners
of Knightsbridge, the right to acquire UC Life for $7,500.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 26
PAGE 26
Notes to Consolidated Financial Statements, continued
For the years ended December 31, 1996 and 1995, PennCorp paid or accrued $2,548
and $3,900 in transaction fees to KM related to the UC Life and SW Financial
transactions, respectively. During 1996, certain of the Company's affiliates and
subsidiaries paid management fees to KM amounting to $2,190 which have been
contingently expensed in the accompanying financial statements pending the
shareholder vote on the acquisition of the Fickes and Stone Knightsbridge
Interests. SW Financial and UC Life incurred KM investment advisory fees
totalling $2,426 and $- during 1996 and 1995, respectively. In addition,
PennCorp received a $1,000 stand-by commitment fee from SW Financial for
contingent financing on a real estate transaction. SW Financial did not draw
upon the commitment.
As required by the joint venture agreement, all bonuses paid to officers of KM
who are also officers of PennCorp must be approved by the Compensation
Committee of the Board of Directors of PennCorp. During 1995, the Company paid
or accrued for KM incentive bonuses to certain individuals who are officers of
PennCorp and KM of approximately $2,400.
In August 1995, the Company sold its preferred and common stock position in a
company which has historically provided investment management services to the
PennCorp insurance subsidiaries and for which a senior executive officer of the
investment management firm is a member of the PennCorp Board of Directors. Fees
paid for such investment management services amounted to $895, $738 and $789
during 1996, 1995 and 1994, respectively.
Certain individuals, who are shareholders, directors and officers of PennCorp,
and affiliates of these individuals, provide services to the Company. During
1996 and 1995, payments aggregating $250 and $210, respectively, were made to
these individuals and their affiliates for services provided in connection with
the Company's acquisition activity. During 1994, fees amounting to $813 were
paid in connection with the establishment of PennCorp's Canadian subsidiary,
the acquisition of AA Life, and certain reinsurance transactions.
(16) OTHER COMMITMENTS AND CONTINGENCIES
On January 22, 1997, the Company filed with the Securities and Exchange
Commission ("SEC"), a preliminary PennCorp Financial Group, Inc. and Washington
National Corporation Joint Proxy Statement and Prospectus ("Joint Proxy
Statement") in which the Company, pending final review by the SEC, will be
soliciting shareholder approval for the following transactions: (i) the
Washington National Merger, (ii) the acquisition of the Controlling Interest in
SW Financial, (iii) the acquisition of the Fickes and Stone Knightsbridge
Interests, and (iv) other items.
Under the terms of the amended and restated Washington National Merger
agreement, Washington National shareholders will receive the right to receive
$29.50 per share of consideration in the form of cash, PennCorp Common Stock,
or a combination of cash and PennCorp Common Stock. The aggregate consideration
to be received by the Washington National shareholders will be approximately
$377,000, of which no more than $100,000 will be payable in cash.
PennCorp will receive its right to acquire the Controlling Interest in SW
Financial through the assignment by Fickes and Stone and Knightsbridge ("the
Controlling Parties") of certain rights including common stock and common stock
equivalents of SW Financial. The Controlling Parties will receive aggregate
cash consideration ranging from $67,500 to $69,600 (not including expenses)
depending upon the outcome of certain contingencies.
In addition, PennCorp has proposed to acquire the Fickes and Stone
Knightsbridge Interests for total consideration estimated to be $10,000. Fickes
and Stone will each receive consideration in the form of estimated annual
payments of $330 due April 15, 1997, each year through 2001 and the by issuance
by PennCorp of 173,160 shares of PennCorp Common Stock to each of Fickes and
Stone on April 15, 2001.
It is anticipated that PennCorp common shareholders will vote on the above
transactions in June 1997, and, subject to shareholder approval, the Company
intends to consummate such transactions as expeditiously as possible.
The Company and its subsidiaries are obligated under operating leases,
primarily for office space. Rent expense, net of sublease income, was $8,416,
$8,489 and $7,172 in 1996, 1995 and 1994, respectively.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 27
PAGE 27
Notes to Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
Minimum lease commitments are:
<C> <C>
1997 $ 8,806
1998 4,269
1999 2,852
2000 1,716
2001 796
2002 and thereafter 177
------------
Total minimum payments required* $ 18,616
=========================================================================================================
</TABLE>
* Total minimum lease payments have not been reduced by minimum sublease
rentals of $947 due in the future under noncancelable subleases.
In January 1996, stockholder derivative lawsuits styled Tozour Energy Systems
Retirement Plan v. David J. Stone et al, and the PennCorp Financial Group,
Inc., C.A. No. 14775 (the "Tozour Case") and Lois Miller v. David J. Stone et
al, and the PennCorp Financial Group, Inc., C.A. No. 14795 (the "Miller
Complaint") were filed against the Company and each of its directors,
individually, in the Delaware Court of Chancery. The complaint in the Miller
suit has not yet been served on the Company or the other defendants. Both
suits allege that the SW Financial Investment involved the usurpation of a
corporate opportunity and a waste of the Company's assets by Messrs. Stone and
Fickes, and that the directors of the Company in approving that transaction,
failed to act in good faith and breached their fiduciary duties, including the
duty of loyalty to the Company and its stockholders, having favored the
interests of Messrs. Stone and Fickes over the Company and its stockholders.
These lawsuits seek judgments against each of the defendants for the amount of
damages sustained, or to be sustained, by the Company as a result of the
breaches of fiduciary duty alleged in the complaint, the imposition of a
constructive trust for the benefit of the Company on profits or benefits
obtained by any defendant through the alleged breaches of fiduciary duty,
attorney's fees and costs, and such other relief as the court determines to be
just, proper or equitable.
The defendants in the Tozour Case have filed a motion seeking its dismissal on
the ground that the plaintiff failed to comply with the requirements of
Delaware law before instituting a derivative suit and intend to defend the
lawsuit vigorously. Because the Company has not been served with the Miller
complaint, no action has been taken in that case, although the Company would
also defend it vigorously. The defendants believe, however, that it would not
be in the best interests of the Company and its shareholders to expend
considerable management and director time and to incur substantial expenses to
litigate the actions. Consequently, the Company's legal advisors have met or
spoken by telephone with the plaintiffs' counsel on several occasions to
discuss the terms of a potential settlement.
The defendants and the plaintiffs' counsel entered into a Stipulation and
Agreement of Compromise and Settlement dated March 28, 1997 (the "Proposed
Settlement") of the shareholder derivative actions. The Proposed Settlement
consists of the following principal elements: (i) Messrs. Stone and Fickes will
cancel the 335,564 SW Financial common stock warrants they hold for no
consideration enabling the Company to purchase the SW Financial Controlling
Interest for $67.5 million, reducing the price to be paid by the Company for
the SW Financial Controlling Interest by approximately $2.0 million, (ii) the
Company's Board of Directors will proceed with the purchase of The Fickes and
Stone Knightsbridge Interests, having received a fairness opinion of a
nationally recognized investment banking firm with respect to the price to be
paid for The Fickes and Stone Knightsbridge Interests, (iii) the Company's
Board of Directors will proceed with the acquisition of the SW Financial
Controlling Interest, having received a fairness opinion of a nationally
recognized investment banking firm with respect to the price to be paid for the
SW Financial Controlling Interest; (iv) the Company's Board of Directors will
submit the purchase of The Fickes and Stone Knightsbridge Interests and the SW
Financial Controlling Interest to a vote of a majority of the Company's
stockholders present at the stockholders meeting and entitled to vote, and
stockholders must approve both transactions, (v) Messrs. Stone and Fickes will
abstain from voting on the proposals to approve the purchase of The Fickes and
Stone Knightsbridge Interests and the SW Financial Controlling Interest, and
(vi) the plaintiffs' counsel will be entitled to conduct confirmatory
discovery.
Certain other lawsuits have been brought against the Company's life insurance
and non-life subsidiaries in the normal course of business involving the
settlement of various matters seeking compensatory and in some cases punitive
damages. Management believes that the ultimate settlement of all such
litigation will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.
Effective January 1, 1996, the Company outsourced the vast majority of its data
center operations and administrative systems programming to a third party
vendor. The processing agreement extends through December 2002 and requires the
Company or its insurance subsidiaries to make payments ranging from
approximately $8,399 to $9,248 during each of the contract years. The contract
has standard provisions for early cancellation, including breakage fees. As
part of the outsourcing agreement, the Company has agreed to provide a line of
credit which may be drawn upon during the first two years, with repayment in
nearly equal monthly installments over the remainder of the contract.
The Company has agreed to provide guarantees of indebtedness of certain
officers and directors up to a maximum of $10,000.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 28
PAGE 28
Notes to Consolidated Financial Statements, continued
The life insurance companies are required to be members of various state
insurance guaranty associations in order to conduct business in those states.
These associations have the authority to assess member companies in the event
that an insurance company conducting business in that state is unable to meet
its policyholder obligations. Assessments from guaranty associations, which
have not been material, are recorded as assessments when received.
The Company has guaranteed approximately $12,800 in mortgage loans sold to
third parties.
(17) REINSURANCE
In the normal course of business, the Company reinsures portions of certain
policies that it underwrites to limit disproportionate risks. The Company
retains varying amounts of individual insurance up to a maximum retention of
$300 on any life. Amounts not retained are ceded to other insurance enterprises
or reinsurers on an automatic or facultative basis.
The Company cedes varying amounts of certain accident and sickness policies up
to a maximum cession of $240, as well as varying portions of certain disability
income policies on a facultative basis.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Therefore, the Company is contingently liable for recoverable
unpaid claims and policyholder liabilities ceded to reinsurers in the unlikely
event that assuming reinsurers are unable to meet their obligations. The
Company evaluates the financial condition of its reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. The effect of
reinsurance on policy revenues earned is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
=========================================================================================================
<S> <C> <C> <C>
Direct policy revenues and amounts
assessed against policyholders $ 358,825 $ 310,693 $ 250,167
Reinsurance assumed 1,320 2,307 765
Reinsurance ceded 12,055 11,111 6,510
--------------------------------------------------
Net premiums and amounts earned $ 348,090 $ 301,889 $ 244,422
=========================================================================================================
</TABLE>
Fees incurred for financial reinsurance were approximately, $265 in 1996, $339
in 1995, and $515 in 1994.
PENNCORP FINANCIAL GROUP, INC.
<PAGE> 29
PAGE 29
UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of the quarterly results of operations for the two
years ended December 31, 1996 and 1995:
(Amounts in thousands, except per share information)
<TABLE>
<CAPTION>
1996 QUARTER-ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
==========================================================================================================
<S> <C> <C> <C> <C>
Total revenues $132,178 $137,424 $148,370 $ 172,172
Net income before extraordinary charge $ 20,154 $ 25,917 $ 22,564 $ 30,748
Net income applicable to common stock $ 16,647 $ 23,208 $ 18,006 $ 24,504
=======================================================
Net income per share of common stock - primary $ 0.66 $ 0.80 $ 0.61 $ 0.84
=======================================================
Net income per share of common stock -
fully diluted $ 0.60 $ 0.73 $ 0.58 $ 0.76
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995 QUARTER-ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
==========================================================================================================
<S> <C> <C> <C> <C>
Total revenues $ 88,694 $ 88,730 $120,112 $ 124,802
Net income before extraordinary charge $ 11,966 $ 15,022 $ 20,698 $ 15,667
Net income applicable to common stock $ 11,100 $ 15,022 $ 18,740 $ 12,810
========================================================
Net income per share of common stock - primary $ 0.54 $ 0.60 $ 0.79 $ 0.54
========================================================
Net income per share of common stock -
fully diluted $ - $ - $ 0.73 $ 0.51
==========================================================================================================
</TABLE>
<PAGE> 30
PAGE 30
INDEPENDENT AUDITORS' REPORT
Board of Directors
Southwestern Financial Corporation:
We have audited the accompanying consolidated balance sheet of Southwestern
Financial Corporation and subsidiaries as of December 31, 1996 and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southwestern
Financial Corporation and subsidiaries as of December 31, 1996 and the results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Dallas, Texas
March 14, 1997
<PAGE> 31
PAGE 31
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1996 and 1995
(In thousands, except share information)
<TABLE>
<CAPTION>
ASSETS 1996 1995
------------- -------------
(UNAUDITED)
<S> <C> <C>
Investments:
Fixed maturities available for sale at fair value (cost $1,270,507 and $1,165,724) . . . . . $ 1,255,270 $ 1,169,478
Equity securities available for sale at fair value (cost $959 and $2,173) . . . . . . . . . . 1,129 2,149
Mortgage loans on real estate, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,993 99,969
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,551 137,466
Cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,895 196,370
Collateral loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,308 41,308
Investment in limited partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 39,600
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,292 17,318
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,553 6,879
----------- ------------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,640,991 1,710,537
Due from reinsurers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259,288 152,866
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,802 21,379
Accounts and notes receivable (net of allowance of $561 and $660) . . . . . . . . . . . . . . . 13,773 2,509
Present value of insurance in force . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,333 115,831
Deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,095 --
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,079 55,500
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,907 2,338
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,642 26,195
Costs in excess of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,640 126,869
----------- ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,210,550 $ 2,214,024
=========== ============
LIABILITIES
Policy liabilities and accruals:
Future policy benefits on traditional products . . . . . . . . . . . . . . . . . . . . . . . $ 584,179 $ 632,259
Universal life and investment contract liabilities . . . . . . . . . . . . . . . . . . . . . 1,088,335 1,106,447
Policy and contract claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,011 62,140
Other policyholder funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,635 20,446
----------- ------------
Total policy liabilities and accruals . . . . . . . . . . . . . . . . . . . . . . . . . . 1,745,160 1,821,292
Federal income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,118 3,900
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159,750 160,000
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,119 70,900
----------- ------------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,032,147 2,056,092
----------- ------------
Mandatorily redeemable preferred stock:
Series A 10%, $.01 par value, $100 redemption value; 500,000 shares authorized, 232,890
and 210,990 issued and outstanding at December 31, 1996 and 1995, respectively. . . . . . . 23,289 21,099
5.5% preferred stock $.01 par value, $10,000 and $100 redemption value; 2,000 and
200,000 shares authorized, 1,059 and 100,260 shares issued and outstanding at
December 31, 1996 and 1995, respectively . . . . . . . . . . . . . . . . . . . . . . . . . 10,590 10,026
SHAREHOLDERS' EQUITY
Common Stock, Class A, $.01 par value; 18,000,000 shares authorized;
3,500,000 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 35 35
Common Stock, Class B, non-voting $.01 par value; 10,000,000 shares authorized;
8,400,000 shares issued and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . 84 84
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,191 123,191
Unrealized gains (losses) on securities available for sale,
net of tax (benefit) of ($4,224) and $1,300 . . . . . . . . . . . . . . . . . . . . . . . . (8,081) 2,413
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,295 1,084
----------- -----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,524 126,807
----------- -----------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . $ 2,210,550 $ 2,214,024
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 32
PAGE 32
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
for the Year Ended December 31, 1996
(In thousands)
<TABLE>
<S> <C>
Revenues:
Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 152,803
Interest sensitive policy product charges . . . . . . . . . . . . . . . . . . . . . . . 44,109
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,972
Net gains from sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 516
Other income, including $15,811 in earnings of limited partnership . . . . . . . . . . . 27,439
----------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353,839
----------
Benefits and expenses:
Policyholders benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197,844
Amortization of present value of insurance
in force and deferred policy acquisition costs . . . . . . . . . . . . . . . . . . . . 23,392
Amortization of costs in excess of net assets acquired . . . . . . . . . . . . . . . . . 4,229
Underwriting and other administrative expenses . . . . . . . . . . . . . . . . . . . . . 65,110
Interest and amortization of deferred debt issuance costs . . . . . . . . . . . . . . . 14,052
----------
Total benefits and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304,627
----------
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,212
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,247
----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,965
Preferred stock dividend requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,754)
----------
Net income available to common shareholders . . . . . . . . . . . . . . . . . . . . . $ 28,211
==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 33
PAGE 33
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the year ended December 31, 1996
(In thousands)
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON COMMON ADDITIONAL ON SECURITIES
STOCK STOCK PAID IN AVAILABLE RETAINED
CLASS A CLASS B CAPITAL FOR SALE, NET EARNINGS TOTAL
----------- ---------- ---------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 . . . . $ 35 $ 84 $ 123,191 $ 2,413 $ 1,084 $ 126,807
Net income . . . . . . . . . . . . . -- -- -- -- 30,965 30,965
Preferred dividends . . . . . . . . . -- -- -- -- (2,754) (2,754)
Unrealized loss on securities
available for sale, net . . . . . -- -- -- (10,494) -- (10,494)
----------- ---------- ---------- ----------- ----------- ---------
Balance at December 31, 1996 . . . . $ 35 $ 84 $ 123,191 $ (8,081) $ 29,295 $ 144,524
=========== ========== ========== =========== =========== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 34
PAGE 34
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
for the Year Ended December 31, 1996
(In thousands)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,965
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Adjustments relating to universal life and investment products:
Interest credited to account balances . . . . . . . . . . . . . . . . . . . . . . . . 56,203
Charges for mortality and administration . . . . . . . . . . . . . . . . . . . . . . . (50,689)
Capitalization of deferred policy acquisition costs . . . . . . . . . . . . . . . . . . (16,806)
Amortization of intangibles, depreciation and accretion, net . . . . . . . . . . . . . . 29,246
Decrease in policy liabilities, accruals and other policyholder funds . . . . . . . . . (54,427)
Decrease in accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . (7,477)
Increase in notes and accounts receivable and accrued
investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,000)
Increase in taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,218
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,945
Equity in undistributed earnings of limited partnership . . . . . . . . . . . . . . . . (15,811)
Net gains from sales of investments . . . . . . . . . . . . . . . . . . . . . . . . . . (516)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,916
----------
Net cash used by operating activities . . . . . . . . . . . . . . . . . . . . . . . . (6,233)
----------
Cash flows from investing activities:
Sales of fixed maturities available for sale . . . . . . . . . . . . . . . . . . . . . . . 178,306
Maturities and other redemptions of fixed maturities available for sale . . . . . . . . . 20,893
Sales and principal repayments of mortgages, real estate and other investments . . . . . . 61,965
Distributions from limited partnership . . . . . . . . . . . . . . . . . . . . . . . . . . 53,520
Purchases of fixed maturities available for sale . . . . . . . . . . . . . . . . . . . . . (323,585)
Purchases of other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (694)
-----------
Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . . (9,595)
----------
Cash flows from financing activities:
Receipts from interest sensitive products credited to policyholders' account balances . . 99,409
Return of policyholders' account balances on interest sensitive products . . . . . . . . . (117,806)
Reduction of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (250)
----------
Net cash used by financing activities . . . . . . . . . . . . . . . . . . . . . . . . (18,647)
----------
Decrease in cash and short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . (34,475)
Cash and short-term investments at beginning of period . . . . . . . . . . . . . . . . . . . 196,370
----------
Cash and short-term investments at end of year . . . . . . . . . . . . . . . . . . . . . . . $ 161,895
==========
Supplemental disclosures:
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 84
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,714
Non-cash financing activities:
Preferred stock issued as dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,754
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE> 35
PAGE 35
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
( Data with respect to December 31, 1995 is unaudited)
(In thousands)
1. BASIS OF PRESENTATION
On December 14, 1995 (the acquisition date), Southwestern Financial Corporation
(SWF or the Company), a newly organized corporation, was formed by PennCorp
Financial Group, Inc. (PennCorp) and Knightsbridge Capital Fund I, L.P.
(Knightsbridge). Its wholly-owned subsidiary, Southwestern Life Acquisition
Corp. (SLAC), was formed to acquire from I.C.H. Corporation (ICH), Southwestern
Life Insurance Company (Southwestern Life) and its wholly-owned subsidiary,
Constitution Life Insurance Company (Constitution) and its 83% owned
subsidiary, ICH Funding Corp. (ICH Funding), and Union Bankers Insurance
Company (Union Bankers) and its wholly-owned subsidiary, Marquette National
Life Insurance Company (Marquette). In addition, a wholly-owned subsidiary of
SWF acquired from ICH substantially all of the assets and liabilities of
Facilities Management Installation, Inc. (FMI), which had provided management
services to ICH's insurance companies. The acquisition was accounted for as a
purchase in accordance with generally accepted accounting principles (GAAP)
and, accordingly, the purchase price was allocated to assets and liabilities
acquired based on estimates of their fair value as of the acquisition date,
which became the new cost basis. Subsequently, the insurance companies were
reorganized such that Constitution became the parent of Southwestern Life and
Union Bankers.
SWF and its subsidiaries market and underwrite a broad range of life insurance,
annuities and accident and health products to individuals through a sales force
of independent agents. The insurance subsidiaries are licensed to write
business in 48 states, the District of Columbia and Guam. Approximately 24% of
the total direct premium of the Company's insurance subsidiaries was generated
from business written in Texas. No other states accounted for more than 10% of
the direct premium of the Company in 1996.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries and ICH Funding. Minority interest in
ICH Funding, totaling $1,486 and $1,174 at December 31, 1996 and 1995,
respectively, are included in accrued expenses and other liabilities. All
significant intercompany accounts and transactions have been eliminated.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the reported amounts of revenues and expenses
during the reporting period. Accounts that the Company deems to be acutely
sensitive to changes in estimates include deferred policy acquisition costs,
future policy benefits, policy and contract claims and present value of
insurance in force. In addition, the Company must determine requirements for
disclosure of contingent assets and liabilities as of the date of the financial
statements based upon estimates. In all instances, actual results could differ
from estimates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Investments
Fixed maturity and equity securities classified as available for sale
are recorded at fair value, as they may be sold in response to changes
in interest rates, prepayment risk, liquidity needs, the need or
desire to increase income or capital and other economic factors.
Changes in unrealized gains and losses related to securities available
for sale are recorded as a separate component of shareholders' equity,
net of applicable taxes and amount attributable to deferred policy
acquisition costs and present value of insurance in force related to
universal life and investment-type products. Mortgage-backed
securities are amortized using the interest method including
anticipated prepayments at the date of purchase. Significant changes
in estimated cash flows from original assumptions are reflected in the
period of such change. Mortgage loans on real estate are
<PAGE> 36
PAGE 36
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recorded at cost, adjusted for amortization of premium or discount and
provision for loan losses, if necessary. Policy loans are recorded at
cost. Short-term investments purchased with maturities generally less
than three months are recorded at cost, which approximates market. All
short-term investments are considered to be cash equivalents.
Real estate, substantially all of which was acquired through
foreclosure, is recorded at the lower of fair value, minus estimated
costs to sell, or cost. If the fair value of the foreclosed real
estate minus estimated costs to sell is less than cost, a valuation
allowance is provided for the deficiency. Increases in the valuation
allowance are charged to income.
Investment in a limited partnership is reflected on the equity method.
Collateral loans are carried at their aggregate unpaid principal
balances.
The Company regularly evaluates investments based on current economic
conditions, past credit loss experience and other circumstances. A
decline in net realizable value that is other than temporary is
recognized as a realized investment loss and a reduction in the cost
basis of the investment. The Company discounts expected cash flows in
the computation of net realizable value of its investments, other than
certain mortgage-backed securities. In those circumstances where the
expected cash flows of residual interest and interest-only
mortgage-backed securities, discounted at a risk-free rate of return,
result in an amount less than the carrying value, a realized loss is
reflected in an amount sufficient to adjust the carrying value of a
given security to its fair value.
Realized investment gains and losses and declines in value which are
other than temporary, determined on the basis of specific
identification, are included in the determination of net income.
(b) Insurance Revenue Recognition
Accident and health insurance premiums are recognized as revenue
ratably over the time period to which premiums relate. Revenues from
traditional life insurance policies represent premiums which are
recognized as earned when due. Benefits and expenses are associated
with earned premiums so as to result in recognition of profits over
the lives of the policies. This association is accomplished by means
of the provision for liabilities for future policy benefits and the
deferral and amortization of policy acquisition costs.
Revenues for interest sensitive products such as universal life and
annuity contracts represent charges assessed against the
policyholders' account balance for the cost of insurance, surrenders
and policy administration. Benefits charged to expenses include
benefit claims incurred during the period in excess of policy account
balances and interest credited to policy account balances.
(c) Policy Liabilities and Accruals
Liabilities for future policy benefits for traditional life products
generally have been computed on the net level premium method, based on
estimated future investment yield, mortality, and withdrawals. For
accident and health products, liabilities for future policy benefits
are established equal to the excess of the present value of future
benefits to or on behalf of policyholders over discounted net future
premiums. Estimates used are based
<PAGE> 37
PAGE 37
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
on the Company's experience adjusted to provide for possible adverse
deviation. These estimates are periodically reviewed and compared with
actual experience. Liabilities for future policy benefits for interest
sensitive products include the balance that accrues to the benefit of
the policyholders and amounts that have been assessed to compensate
the life insurance subsidiaries for services to be provided in the
future.
Policy and contract claims represent estimates of reported claims and
claims incurred but not reported based on experience.
(d) Accounts and Notes Receivable
Accounts and notes receivable consist primarily of agents' balances
and premium receivable from agents and policyholders. Agents' balances
are partially secured by commissions due to agents in the future and
premiums receivable are secured by policy liabilities. An allowance
for doubtful accounts is established, based upon specific
identification and general provision, for amounts which the Company
estimates will not ultimately be collected.
(e) Deferred Policy Acquisition Costs
Estimated costs of acquiring new business which vary with, and are
primarily related to, the production of new business, have been
deferred to the extent that such costs are deemed recoverable from
future revenues. Such estimated costs include commissions and certain
costs of policy issuance and underwriting. Costs deferred on accident
and health and traditional life policies are amortized, with interest,
over the anticipated premium-paying period of the related policies in
proportion to the ratio of annual premium revenue to expected total
premium revenue to be received over the life of the policies. Expected
premium revenue is estimated by using the same mortality, morbidity
and withdrawal assumptions used in computing liabilities for future
policy benefits. For interest sensitive products and limited pay life
products, policy acquisition costs are amortized in relation to the
emergence of anticipated gross profits over the life of the policies.
(f) Present Value of Insurance In Force
The present value of insurance in force represents the anticipated
gross profits to be realized from future revenues on insurance in
force at the date such insurance was purchased, discounted to provide
an appropriate rate of return and amortized, with interest, based on
policy liability or contract rate, over the years that such profits
are anticipated to be received in proportion to the estimated gross
profits.
(g) Deferred Debt Issuance Costs
Deferred debt issuance costs, which are included in other assets,
represent costs incurred in connection with obtaining long-term debt
financing which have been capitalized and are being amortized on an
interest yield method over the terms of the respective debt. Deferred
costs totaled $3,309 and $4,110 which are net of accumulated
amortization of $801 and $0 at December 31, 1996 and 1995,
respectively.
<PAGE> 38
PAGE 38
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(h) Costs in Excess of Net Assets Acquired
Costs in excess of the fair value of net assets acquired are amortized
on a straight-line basis over 30 years. Accumulated amortization
totaled $4,229 and $0 at December 31, 1996 and 1995, respectively.
(i) Property and Equipment
These assets consist of electronic data processing equipment,
furniture, and other equipment, and are carried at cost, less
accumulated depreciation. Depreciation is provided using the
straight-line method over the estimated useful lives of these assets.
(j) Recoverability of Long-lived Assets
The Company continually monitors long-lived assets and certain
intangible assets, such as costs in excess of net assets acquired and
present value of insurance in force, for impairment. An impairment
loss is recorded in the period in which the carrying value of the
assets exceeds the fair value or expected future cash flows. Any
amounts deemed to be impaired are charged, in the period in which such
impairment was determined, as an expense against earnings. For the
period presented there was no charge to earnings for the impairment of
long-lived assets.
(k) Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to (i) temporary differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases, and (ii) operating losses
and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income
in the years in which the temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(l) Reinsurance
Financial reinsurance that does not transfer significant insurance
risk is accounted for as a deposit and is reflected as a component of
due from reinsurers. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the underlying reinsurance
policies. Balances due to, or from, reinsurers have been reflected as
assets and liabilities rather than being netted against the related
account balances.
<PAGE> 39
PAGE 39
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
3. INVESTMENTS
Investments in a single entity, other than obligations of the U.S. Government
or agencies thereof, totaling in excess of 10% of total shareholders equity at
December 31, 1996 and 1995 are listed below:
<TABLE>
<CAPTION>
1996 1995
------------------------ -----------------------
PERCENT OF PERCENT OF
CARRYING SHAREHOLDERS' CARRYING SHAREHOLDERS'
VALUE EQUITY VALUE EQUITY
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
James M. Fail and Stone Capital, Inc. (formerly
CFSB Corp.) Collateral loans . . . . . . . . . $ 21,308 14.7% $ 41,308 32.6%
Fund America Investors Corp., Ser. 93-C,
Class B Certificates . . . . . . . . . . . . . . 16,250 11.2 10,908 8.6
GSSW Limited Partnership . . . . . . . . . . . . . -- -- 39,600 31.2
</TABLE>
The amortized cost and estimated fair value of investments in fixed maturities
available for sale at December 31, 1996 and 1995 by categories of securities
are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1996:
Mortgage-backed securities . . . . . . . . . . . . . $ 609,593 $ 8,153 $ (7,304) $ 610,442
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies . . . . 49,598 224 (343) 49,479
Debt securities issued by states of the United States
and political subdivisions of the states . . . . 15,226 -- (388) 14,838
Debt securities issued by foreign governments 22,698 176 (870) 22,004
Corporate debt securities . . . . . . . . . . . . . 573,392 1,429 (16,314) 558,507
------------ ------------ ----------- ------------
Total fixed maturities available for sale . . . . $ 1,270,507 $ 9,982 $ (25,219) $ 1,255,270
============ ============ =========== ============
</TABLE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
December 31, 1995:
Mortgage-backed securities . . . . . . . . . . . . . . $ 489,810 $ 1,222 $ (615) $ 490,417
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies . . . . . 39,375 168 -- 39,543
Debt securities issued by states of the United States
and political subdivisions of the states . . . . . 15,812 -- -- 15,812
Debt securities issued by foreign governments 18,518 212 -- 18,730
Corporate debt securities . . . . . . . . . . . . . . 602,209 2,805 (38) 604,976
------------ ------------ ----------- ------------
Total fixed maturities available for sale . . . . . $ 1,165,724 $ 4,407 $ (653) $ 1,169,478
============ ============ =========== ============
</TABLE>
Included in fixed maturities available for sale at December 31, 1996 and 1995
are investments with a fair value of $78,118 and $103,284, respectively, which
are not publicly traded. Included in fixed maturities available for sale at
<PAGE> 40
PAGE 40
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
3. INVESTMENTS (CONTINUED)
December 31, 1996 and 1995, are below investment-grade securities with
amortized costs of $40,177 and $65,475, respectively, and fair values of
$39,955 and $66,253, respectively.
The Company had non-income producing investments at December 31, 1996 with an
amortized cost and fair value as follows:
<TABLE>
<CAPTION>
AMORTIZED
COST FAIR VALUE
------------- -------------
<S> <C> <C>
Fixed maturities . . . . . . . . . . . . . . $ 571 $ 405
Equity securities . . . . . . . . . . . . . 434 620
Mortgage loans . . . . . . . . . . . . . . . 1,141 1,141
Real estate . . . . . . . . . . . . . . . . 7,292 7,292
Other investments . . . . . . . . . . . . . 992 1,618
------------- -------------
$ 10,430 $ 11,076
============= =============
</TABLE>
At December 31, 1996 net unrealized appreciation of equity securities of $170
consisted of gross unrealized gains of $207, less unrealized losses of $37. At
December 31, 1995 net unrealized depreciation of $24 consisted of gross
unrealized gains of $21, less unrealized losses of $45.
Following is an analysis of net gains (losses) from sale of investments for the
year ended December 31, 1996:
<TABLE>
<S> <C>
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,385
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43)
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,736
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (125)
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,437)
----------
$ 516
==========
</TABLE>
For the year ended December 31, 1996, net realized gains on sale of fixed
maturities consisted of gross gains of $2,923 and gross losses of $1,538.
<PAGE> 41
PAGE 41
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
3. INVESTMENTS (CONTINUED)
Following are changes in unrealized appreciation (depreciation) on investments
for the year ended December 31, 1996:
<TABLE>
<S> <C>
Investments carried at fair value:
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (18,991)
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,652
----------
(17,145)
Less effect on other balance sheet accounts:
Value of business acquired and deferred acquisition costs . . . . . . . . . . . . . . 1,362
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,524
Minority interest in unrealized losses . . . . . . . . . . . . . . . . . . . . . . . . (235)
----------
Change in unrealized investment gains and losses . . . . . . . . . . . . . . . . . . . . $ (10,494)
==========
</TABLE>
The amortized cost and estimated fair value of fixed maturities at December 31,
1996, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- ------------
<S> <C> <C>
Available for sale:
Due in one year or less . . . . . . . . . . . . . . . . . . . . . $ 25,515 $ 25,510
Due after one year through five years . . . . . . . . . . . . . . 126,895 126,285
Due after five years through ten years . . . . . . . . . . . . . . 250,592 245,188
Due after ten years . . . . . . . . . . . . . . . . . . . . . . . 257,912 247,845
----------- ------------
660,914 644,828
Mortgage-backed securities . . . . . . . . . . . . . . . . . . . . 609,593 610,442
----------- ------------
$ 1,270,507 $ 1,255,270
=========== ============
</TABLE>
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without prepayment
penalties.
Investments with a fair value of $121,617 and $146,888 were on deposit with
certain regulatory authorities at December 31, 1996 and 1995, respectively.
<PAGE> 42
PAGE 42
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
3. INVESTMENTS (CONTINUED)
Major categories of net investment income for the year ended December 31, 1996
consist of the following:
<TABLE>
<S> <C>
Fixed maturities . . . . . . . . . . . . . . . . . . . . . . . . $ 87,348
Equity securities . . . . . . . . . . . . . . . . . . . . . . . 58
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . 11,156
Policy loans . . . . . . . . . . . . . . . . . . . . . . . . . . 8,011
Short-term investments . . . . . . . . . . . . . . . . . . . . . 7,738
Collateral loans . . . . . . . . . . . . . . . . . . . . . . . . 2,947
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . 4,236
Investments held in trust under reinsurance treaty(a) . . . . . 12,130
Other investments . . . . . . . . . . . . . . . . . . . . . . . 1,503
Investment expenses . . . . . . . . . . . . . . . . . . . . . . (6,155)
----------
$ 128,972
- -------------------- ==========
</TABLE>
(a) Investments held in trust by a reinsurer with carrying values of
$121,016 and $133,742 as of December 31, 1996 and 1995,
respectively, are included in amounts due from reinsurers (see
Note 12).
At December 31, 1996 and 1995 the Company held mortgage loans principally
involving commercial real estate with carrying values and estimated fair values
of $59,993 and $99,969, respectively, net of an allowance for losses of $1,000
at December 31, 1996. The average outstanding loan balances are approximately
$955 and $1,134 at December 31, 1996 and 1995, respectively. At December 31,
1996 mortgage loan investments were concentrated in the following states:
<TABLE>
<CAPTION>
PERCENT OF TOTAL
CARRYING VALUE CARRYING TOTAL
-------------- --------------
<S> <C> <C>
Texas . . . . . . . . . . . . . . . . . . . $ 30,319 50.5%
Illinois . . . . . . . . . . . . . . . . . . 7,657 12.8
Oklahoma . . . . . . . . . . . . . . . . . . 5,631 9.4
Florida . . . . . . . . . . . . . . . . . . 3,161 5.3
Kansas . . . . . . . . . . . . . . . . . . . 3,105 5.2
All other . . . . . . . . . . . . . . . . . 10,120 16.8
----------- ------
Balance, end of period . . . . . . . . . . . $ 59,993 100.0%
=========== ======
</TABLE>
4. INVESTMENT IN GSSW LIMITED PARTNERSHIP
At December 31, 1995, the limited partnership investment represented a 50%
interest in a partnership, GSSW, L.P. (GSSW) formed to acquire through auction
certain mortgage loans and real estate formerly held by failed savings and loan
associations. Effective December 31, 1996, GSSW liquidated the general partner
interests through distribution of certain assets at fair value, sold
substantially all remaining investments and utilized the proceeds to buy the
limited partnership interest not owned by the Company. As a result of these
transactions, the Company became the parent of GSSW, realized earnings on GSSW
of $13,171, received net cash distributions of $47,520 and paid PennCorp, a
shareholder, a fee of $1,000 as guarantor in GSSW's sale of assets.
<PAGE> 43
PAGE 43
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
4. INVESTMENT IN GSSW LIMITED PARTNERSHIP (CONTINUED)
Following is an analysis of the investment in the GSSW limited partnership for
the year ended December 31, 1996:
<TABLE>
<S> <C>
Balance, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,600
Equity in operating earnings during year . . . . . . . . . . . . . . . . . . . . 3,640
Equity in earnings on transactions at December 31, 1996 . . . . . . . . . . . . 13,171
Distributions during year . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,000)
Net distributions at December 31, 1996 . . . . . . . . . . . . . . . . . . . . . (47,520)
----------
Balance, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,891
==========
</TABLE>
At December 31, 1996, the accounts of GSSW are consolidated into the
accompanying consolidated balance sheet.
5. BUSINESS SEGMENT INFORMATION
The Company's only reportable segment is life insurance. Within the life
insurance segment, the Company and its subsidiaries are principally engaged in
the sale and underwriting of individual life and health insurance, and
accumulation products, principally annuities.
Assets and related investment income are allocated based upon related insurance
reserves which are backed by such assets. Other operating expenses are
allocated to each segment based on a number of assumptions and estimates
generally in relation to the mix of related revenues. Total revenues and income
before income taxes by product for the year ended December 31, 1996 are as
follows:
<TABLE>
<S> <C>
Total revenues:
Individual life products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 165,723
Individual health products . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,391
Accumulation products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,427
Corporate and eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,298
----------
$ 353,839
==========
Income before income taxes:
Individual life products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,919
Individual health products . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,744
Accumulation products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,118
Corporate and eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,569)
----------
$ 49,212
==========
</TABLE>
Total assets by product as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Total assets:
Individual life products . . . . . . . . . . . . . . . . . . . . . . . $ 1,203,950 $ 1,205,746
Individual health products . . . . . . . . . . . . . . . . . . . . . . 332,118 292,942
Accumulation products . . . . . . . . . . . . . . . . . . . . . . . . 486,910 520,656
Corporate and eliminations . . . . . . . . . . . . . . . . . . . . . . 187,572 194,680
------------ ------------
$ 2,210,550 $ 2,214,024
============ ============
</TABLE>
<PAGE> 44
PAGE 44
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
6. POLICY LIABILITIES AND ACCRUALS
For interest sensitive life products and annuity products, the liability for
future policy benefits is equal to the accumulated fund value. Fund values are
equal to the excess premium received and interest credited to the fund value
less deductions for mortality costs and expense charges. Current interest rates
credited range from 4% to 8%. Mortality costs and expense charges are
established by the Company based upon its experience and cost structure.
For traditional life products, the liability for future policy benefits has
been computed by the net level premium method based on estimated future
investment yield, mortality, and withdrawal experience. Reserve interest
assumptions are graded and range from 6.25% to 7.375%. For accident and health
products, liabilities for future policy benefits are established equal to the
excess of the present value of future benefits to or on behalf of policyholders
over future net premiums discounted at interest rates ranging primarily from
6.5% to 8.0%. The future policy benefits of traditional life products and
accident and health products are determined using mortality, morbidity and
withdrawal assumptions that reflect the experience of the Company modified as
necessary to reflect anticipated trends and to include provisions for possible
unfavorable deviations. The assumptions vary by plan, year of issue and
duration.
Policy and contract claims include provisions for reported claims in process of
settlement, valued in accordance with the terms of the related policies and
contracts, as well as provisions for claims incurred and unreported based on
the Company's prior experience.
While management believes the estimated amounts included in financial
statements for reserves and claims are adequate, such estimates may be more or
less than the amounts ultimately paid when the claims are settled.
Total policy liabilities and accruals consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Future policy benefits on traditional products:
Traditional life insurance contracts . . . . . . . . . . . $ 344,520 $ 352,809
Traditional annuity products . . . . . . . . . . . . . . . 105,246 114,333
Individual accident and health . . . . . . . . . . . . . . 104,071 132,091
Unearned premiums . . . . . . . . . . . . . . . . . . . . 30,342 33,026
------------- -------------
Total future policy benefits 584,179 632,259
------------- -------------
Universal life and investment contract liabilities:
Universal life and annuities . . . . . . . . . . . . . . . 1,086,632 1,099,697
Guaranteed investment contracts . . . . . . . . . . . . . 1,703 6,750
------------- -------------
Total universal and investment contract liabilities . . 1,088,335 1,106,447
------------- -------------
Policy and contract claims . . . . . . . . . . . . . . . . . 55,011 62,140
Other policyholder funds . . . . . . . . . . . . . . . . . . 17,635 20,446
------------- -------------
Total policy liabilities and accruals . . . . . . . . . $ 1,745,160 $ 1,821,292
============= =============
</TABLE>
<PAGE> 45
PAGE 45
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
6. POLICY LIABILITIES AND ACCRUALS (CONTINUED)
The following table presents information on changes in the liability for policy
and contract claims for the year ended December 31, 1996:
<TABLE>
<S> <C>
Policy and contract claims at January 1 . . . . . . . . . . . . . . . . . . . $ 62,140
Less reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . 118
-----------
Net balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 62,022
-----------
Add claims incurred, net of reinsurance related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,496
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,646)
-----------
88,850
-----------
Deduct claims paid, net of reinsurance related to:
Current year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,240
Prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,774
-----------
96,014
-----------
Policy and contract claims, net of related reinsurance recoverables at December 31 54,858
Plus reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . 153
-----------
Policy and contract claims at December 31 . . . . . . . . . . . . . . . . . . $ 55,011
===========
</TABLE>
As a result of changes in estimates of insured events in prior years, the
liability for policy and contract claims decreased, net of reinsurance, by
$2,646 in 1996.
7. NOTES PAYABLE
The outstanding principal amounts of notes payable at December 31, 1996 and
1995 consist of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Revolving bank debt . . . . . . . . . . . . . . $ 95,000 $ 95,000
Bank debt with quarterly principal requirements 24,750 25,000
Convertible subordinated notes issued to ICH for
acquisition of insurance subsidiaries . . . . 40,000 40,000
----------- ----------
$ 159,750 $ 160,000
=========== ===========
</TABLE>
Interest costs under the revolving bank debt totaled $8,128 for the year ended
December 31, 1996. The interest rate of the debt is based on, at the Company's
option, either a floating rate (based on the base rate of the First National
Bank of Chicago) plus a margin of 1.75% or a Eurodollar rate (based on the
London Interbank Offered Rate or LIBOR) plus a margin of 2.75%. At December 31,
1996, the effective rate of the revolving loan was approximately 8.3%.
Interest costs under the bank term debt totaled $2,250 for the year ended
December 31, 1996. The interest rate of the term debt is based on, at the
Company's option, either a floating rate (based on the base rate of the First
National Bank of Chicago) plus a margin of 2.25% or a Eurodollar rate (based on
LIBOR) plus a margin of 3.25%. At December 31, 1996, the effective rate of the
term loans was approximately 8.8%.
<PAGE> 46
PAGE 46
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
7. NOTES PAYABLE (CONTINUED)
As part of the consideration for the acquisition of Southwestern Life, Union
Bankers, Constitution and Marquette from ICH, the Company issued to ICH a
$40,000 aggregate principal amount of SWF's 7.0% Convertible Subordinated Notes
due 2005. The notes are convertible into an aggregate 3,200,000 shares of
common stock of SWF, of which 800,000 will be Class B non-voting common stock.
In the aggregate the shares upon conversion represent approximately 21.2% of
SWF's fully diluted shares at closing before giving effect to certain warrants
outstanding. On June 15, 1997, SWF will either (i) offer to repurchase any and
all notes then outstanding at 100% of the principal amount thereof plus accrued
and unpaid interest to the repurchase date (the "Interim Repurchase Offer") or
(ii) reset the interest rate on the Convertible Notes, immediately after such
adjustment, to have a bid price equal to 100% of the principal amount. If SWF
makes the Interim Repurchase Offer, there will be no interest rate reset on any
Convertible Notes not tendered to SWF for purchase pursuant to the Interim
Repurchase Offer. The Convertible Notes are unsecured obligations and are
subordinate in right of payment to SWF's bank debt and all of the indebtedness
of SWF. Interest costs under the Convertible Notes totaled $2,800 for the year
ended December 31, 1996. The Company agreed to maintain sufficient cash and
cash equivalents to fund the interest payments on the Convertible Notes for the
first three years. At December 31, 1996 and December 31, 1995, restricted cash
and short-term investments totaled $5,959 and $8,400, respectively.
The Company has pledged the stock of certain of its insurance subsidiaries as
collateral under the bank credit facilities. In addition, the bank loans
contain a number of covenants. These prohibit the Company from paying cash
dividends on its preferred or common stock without the banks' consent. In
addition, except for transactions in the ordinary course of business, the
Company and its subsidiaries can not loan or borrow monies, acquire assets in
excess of specified limits, grant liens or generally take any other action
which would result in any material change in the Company or its subsidiaries
without prior written consent of such banks. The Company is also required to
maintain a specified minimum net worth and comply with certain financial
ratios. The Company was in compliance with all applicable covenants as of
December 31, 1996.
In conjunction with the bank debt, the Company entered into interest rate
protection agreements in the form of a series of interest rate caps in the
notional amount of $62,500 which expire May 1998. These entitle the Company to
revenue should three-month LIBOR exceed the cap rate of 7.5%. At December 31,
1996, three-month LIBOR was 5.56%.
The aggregate maturities of notes payable during each of the five years after
December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,788
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,291
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,711
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,692
2002 and thereafter . . . . . . . . . . . . . . . . . . . . . 105,268
-----------
$ 159,750
===========
</TABLE>
8. PREFERRED AND COMMON STOCK
On December 14, 1995, the Company issued 210,000 shares of Series A preferred
stock with a liquidation value of $21,000. The Series A preferred stock
accrues dividends at a rate of 10.0% per annum, compounded quarterly and is
mandatorily redeemable at December 31, 2005. Dividends on the Series A
preferred stock are payable in cash, or at SWF's option, are payable in kind.
The Series A preferred stock is not redeemable at the option of the Company but
<PAGE> 47
PAGE 47
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
8. PREFERRED AND COMMON STOCK (CONTINUED)
at maturity will be required to be redeemed for approximately $56 million in
cash assuming no cash dividend distributions. If the Company fails to satisfy
its mandatory redemption obligation, the holders of the Series A preferred
stock will be entitled to elect 49.0% of the members of the Board of SWF and,
upon receipt of regulatory approval, a majority of the directors of SWF. The
Series A preferred stock is senior preferred stock. The holders of the Series A
preferred stock are entitled to class voting rights under certain
circumstances, including in connection with a merger of SWF or a sale of all or
substantially all its assets or the authorization or issuance of senior or pari
passu preferred stock, and as otherwise provided by law. For the year ended
December 31, 1996, 21,900 additional shares were issued with a redemption value
of $2,190 in lieu of cash to satisfy dividend requirements.
In addition, certain of PennCorp's insurance subsidiaries purchased $10,000
liquidation value of 5.5% Mandatorily Redeemable Preferred Stock, par value
$0.01 per share (the 5.5% Preferred Stock) of SLAC, a wholly-owned subsidiary
of SWF. During 1996 SLAC was dissolved and the 5.5% Preferred Stock was
exchanged for 5.5% Preferred Stock of Southwestern Life Companies, Inc. (SLC),
also a wholly-owned subsidiary of SWF. The 5.5% Preferred Stock accrues
dividends payable in cash or, subject to certain conditions, through the
issuance of additional shares of 5.5% Preferred Stock. The 5.5% Preferred Stock
is not subject to optional redemption and matures on December 31, 2005. If SLC
fails to satisfy its mandatory redemption obligation or if dividends payable on
the 5.5% Preferred Stock are in arrears for four or more quarterly dividend
periods, the holders of the 5.5% Preferred Stock will be entitled to elect
49.0% of the members of the Board of Directors of SLC and, upon receipt of
regulatory approval, a majority of the Board of Directors of SLC. The 5.5%
Preferred Stock is the only preferred stock of SLC authorized for issuance. The
holders of the 5.5% Preferred Stock are entitled to class voting rights under
certain circumstances, including in connection with a merger of SLC or a sale
of all or substantially all its assets or the authorization or issuance of
senior pari passu preferred stock, and as otherwise provided by law. For the
year ended December 31, 1996, 59 additional shares were issued with a
redemption value of $590 in lieu of cash to satisfy dividend requirements of
$564 in 1996 and $26 in 1995.
In conjunction with the acquisition of its insurance subsidiaries on December
14, 1995, SWF issued warrants to the shareholders of SWF for the purchase of up
to an additional 1,785,000 shares of Class B voting common stock at an exercise
price of $10.00 per share. The warrants are exercisable at any time until their
expiration on December 15, 2005.
9. INCOME TAXES
The Company and its non-insurance subsidiaries file a consolidated federal
income tax return. The Company's life insurance subsidiaries also file federal
income tax returns as a consolidated group.
Total income taxes for the year ended December 31, 1996 are as follows:
<TABLE>
<S> <C>
Current . . . . . . . . . . . . . . . . . . . . . . . . $ 5,302
Deferred . . . . . . . . . . . . . . . . . . . . . . . . 12,945
----------
$ 18,247
==========
</TABLE>
<PAGE> 48
PAGE 48
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
9. INCOME TAXES (CONTINUED)
Income taxes computed using the prevailing corporate tax rate of 35% are
reconciled to the Company's actual income tax expense attributable to income
for the year ended December 31, 1996, as follows:
<TABLE>
<S> <C>
Tax expense computed at statutory rate . . . . . . . . . . $ 17,224
Amortization of costs in excess of net assets acquired . . 1,480
Change in deferred tax asset valuation allowance . . . . . (183)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . (274)
-----------
$ 18,247
==========
</TABLE>
Temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities that give rise to the deferred tax assets
(liabilities) at December 31, 1996 and 1995 relate to the following:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Deferred tax assets:
Deferred policy acquisition costs . . . . . . . . . . . . . . . . $ 10,407 $ 12,334
Future policy benefits . . . . . . . . . . . . . . . . . . . . . . 112,408 132,330
Invested assets, subject to capital gains treatment . . . . . . . 16,895 18,669
Unrealized loss . . . . . . . . . . . . . . . . . . . . . . . . . 4,224 --
----------- -----------
143,934 163,333
----------- -----------
Deferred tax liabilities:
Present value of insurance in force . . . . . . . . . . . . . . . (24,967) (40,541)
Other assets and liabilities . . . . . . . . . . . . . . . . . . . (50,280) (45,201)
Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . -- (1,300)
----------- -----------
(75,247) (87,042)
----------- -----------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . 68,687 76,291
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . (20,608) (20,791)
----------- -----------
$ 48,079 $ 55,500
=========== ===========
</TABLE>
The valuation allowance at December 31, 1996, is attributable to deferred tax
assets principally arising from differences in the book and tax bases of
invested assets subject to capital gains treatment that existed as of the date
of acquisition of the company's insurance subsidiaries. To the extent that
income tax benefits relative to such tax assets are ultimately realized, the
reduction in the related valuation allowance would be allocated to reduce costs
in excess of net assets acquired.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax assets is
dependent on the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon those
considerations, management believes it is more likely than not that the Company
will realize the benefits of these deductible differences, net of the existing
valuation allowance at December 31, 1996.
At December 31, 1996, the Company has net operating loss carryovers available
of $561 related to the non-life consolidated return, of which $250 expires in
2010 and $311 expires in 2011.
<PAGE> 49
PAGE 49
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
10. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN FORCE
Deferred policy acquisition costs represent commissions and certain costs of
policy issuance and underwriting. Information relating to these costs for the
year ended December 31, 1996 is as follows:
<TABLE>
<S> <C>
Policy acquisition costs deferred:
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,810
Underwriting and issue costs . . . . . . . . . . . . . . . . . . . . . . . . 4,996
Released by 80% coinsurance of Medicare business (see Note 12) . . . . . . . . (1,243)
Policy acquisition costs amortized . . . . . . . . . . . . . . . . . . . . . . (503)
Unrealized investment loss adjustment . . . . . . . . . . . . . . . . . . . . 35
-----------
Unamortized deferred policy acquisition costs at period end . . . . . . . . . $ 15,095
===========
</TABLE>
As part of the purchase accounting for the Company's acquisitions, a present
value of insurance in force asset is established which represents the value of
the right to receive future cash flows from insurance contracts existing at the
date of acquisition. Such value is the actuarially determined present value of
the projected cash flows from the acquired policies, discounted at an
appropriate risk rate of return.
The methods used by the Company to value the health, life and annuity products
purchased are consistent with the valuation methods used most commonly to value
blocks of insurance business. It is also consistent with the basic methodology
generally used to value insurance assets. The method used by the Company
includes identifying the future cash flows from the acquired business, the
risks inherent in realizing those cash flows, the rate of return the Company
believes it must earn in order to accept the risks inherent in realizing the
cash flows, and determining the value of the insurance asset by discounting the
expected future cash flows by the discount rate the Company requires.
The discount rate used to determine such values is the rate of return required
in order to invest in the business being acquired. In selecting the rate of
return, the Company considered the magnitude of the risks associated with
actuarial factors described in the following paragraph, cost of capital
available to the Company to fund the acquisition, compatibility with other
Company activities that may favorably affect future profits, and the complexity
of the acquired company.
Expected future cash flows used in determining such values are based on
actuarial determinations of future premium collection, mortality, morbidity,
surrenders, operating expenses and yields on assets held to back policy
liabilities as well as other factors. Variances from original projections,
whether positive or negative, are included in income as they occur. To the
extent that these variances indicate that future cash flows will differ from
those included in the original scheduled amortization of the value of the
insurance in force, current and future amortization may be adjusted.
Recoverability of the value of insurance in force is evaluated annually and
appropriate adjustments are then determined and reflected in the financial
statements for the applicable period.
<PAGE> 50
PAGE 50
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
10. DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF INSURANCE IN FORCE
(CONTINUED)
Information related to the present value of insurance in force for the year
ended December 31, 1996 is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . $ 115,831
Released by 80% coinsurance of Medicare business (see Note 12) . . . . . . . . (22,936)
Accretion of interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,415
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,304)
Unrealized investment loss adjustment . . . . . . . . . . . . . . . . . . . . 1,327
-----------
Balance at December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . $ 71,333
===========
</TABLE>
Expected gross amortization, based upon current assumptions and accretion of
interest at a policy liability or contract rate ranging from 0% to 6.6% for the
next five years of the present value of insurance in force is as follows:
<TABLE>
<CAPTION>
BEGINNING GROSS ACCRETION NET
BALANCE AMORTIZATION OF INTEREST AMORTIZATION
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
1997 . . . . . . . . . . . . . . . . $ 71,333 $ 15,749 $ 3,584 $ 12,165
1998 . . . . . . . . . . . . . . . . 59,168 13,043 2,978 10,065
1999 . . . . . . . . . . . . . . . . 49,103 10,317 2,491 7,826
2000 . . . . . . . . . . . . . . . . 41,277 8,314 2,110 6,204
2001 . . . . . . . . . . . . . . . . 35,073 6,977 1,802 5,175
</TABLE>
11. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS
Pursuant to the terms of the surplus debenture issued by Constitution to the
benefit of SLC, a non-insurance subsidiary of SWF, Constitution may make
principal and interest payments to the extent that Constitution's surplus,
excluding the statutory carrying value of Southwestern Life and Union Bankers,
exceeds $1,200. Constitution's surplus at December 31, 1996 was $177,510, of
which $159,074 was attributable to its ownership of Southwestern Life and Union
Bankers.
The Company's cash flow is derived principally from dividends and principal and
interest payments owed on the surplus debenture by Constitution. The principal
source of repayment of the surplus debenture is dividends from Constitution's
subsidiaries, Southwestern Life and Union Bankers. Generally, the net assets of
the insurance subsidiaries available for transfer to the Company are limited to
the greater of the subsidiary net gain from operations during the preceding
year or 10% of the subsidiary net statutory surplus as of the end of the
preceding year as determined in accordance with accounting practices prescribed
or permitted by insurance regulatory authorities. Payment of dividends in
excess of such amounts would generally require approval by the regulatory
authorities. Based upon Constitution's net gain from operations for the year
ended December 31, 1996, approximately $19,000 of dividends could be paid to
its parent without prior regulatory approval.
The insurance subsidiaries prepare their statutory financial statements in
accordance with accounting practices prescribed or permitted by their
respective state insurance departments. Prescribed statutory accounting
practices include state laws, regulations, and general administrative rules, as
well as a variety of publications of the National Association of Insurance
Commissioners (NAIC). Permitted statutory accounting practices encompass all
accounting practices that are approved by insurance regulatory authorities;
such practices differ from state to state, and may differ from company to
company within a state, and may change in the future. Furthermore, the NAIC has
a project to codify statutory
<PAGE> 51
PAGE 51
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
11. STATUTORY ACCOUNTING AND DIVIDEND RESTRICTIONS (CONTINUED)
accounting practices, the result of which is expected to constitute the only
source of "prescribed" statutory accounting practices. Accordingly, that
project, will likely change to some extent prescribed statutory accounting
practices, and may result in changes to the accounting practices that insurance
enterprises use to prepare their statutory financial statements.
Statutory capital and surplus of the Company's life insurance subsidiaries as
reported to regulatory authorities at December 31, 1996 and 1995 totaled
approximately $177,510 and $128,729, respectively. Statutory net income of the
Company's life insurance subsidiaries as reported to regulatory authorities
totaled $24,919 for the year ended December 31, 1996.
12. REINSURANCE
In the normal course of business, the Company reinsures portions of certain
policies that it underwrites to limit disproportionate risks. The Company
retains varying amounts of individual insurance up to a maximum retention of
$500 on any life. Amounts not retained are ceded to other insurance enterprises
or reinsurers on an automatic or facultative basis.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Therefore, the Company is contingently liable for recoverable
unpaid claims and policyholder liabilities ceded to reinsurers in the unlikely
event that assuming reinsurers are unable to meet their obligations. The
Company evaluates the financial condition of its reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies. The effect of
reinsurance on policy revenues earned and the related benefits incurred by such
reinsurers for the year ended December 31, 1996 is as follows:
<TABLE>
<S> <C>
Direct policy revenues and amounts assessed against policyholders . . . $ 255,352
Reinsurance assumed . . . . . . . . . . . . . . . . . . . . . . . . . . 3,483
Reinsurance ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . (61,923)
-----------
Net premiums and amounts earned . . . . . . . . . . . . . . . . . . . . $ 196,912
===========
Policyholder benefits ceded . . . . . . . . . . . . . . . . . . . . . . $ 25,513
===========
</TABLE>
Effective July 1, 1996, Union Bankers entered into reinsurance agreements with
Cologne Life Reinsurance Company ("Cologne") to coinsure 80% of its Medicare
supplement business in force on July 1, 1996 and to coinsure 80% of its
Medicare policies issued on or after July 1, 1996. The Company recorded a
deferred gain on the transaction of $53,893 as of July 1, 1996, which is being
amortized into income over the life of the business. Since July 1, 1996, $6,445
of the deferred gain has been recognized and is included in other income. The
Company is not subject to any negative experience adjustments if the ceded
business is unprofitable; however, the Company may participate in a portion of
future earnings from the ceded business after Cologne recovers its initial
ceding commission plus interest at a specified rate. Union Bankers retained
administration for the ceded block of business and is reimbursed by Cologne for
administrative costs at the rate of 8.5% of ceded renewal premiums and 11.5% of
ceded first year premiums.
Southwestern Life has ceded a block of annuities under a reinsurance agreement
with Employees Reassurance Corporation (ERC). Such reinsurance is accounted for
as a financing arrangement and is not reflected in the accompanying financial
statements except for the risk fees paid to ERC. Statutory surplus provided by
this treaty totaled $8,714 and $13,074 at December 31, 1996 and 1995,
respectively. Risk fees paid to the reinsurer were 2% of the net amount of
surplus provided and totaled $222 for the year ended December 31, 1996.
<PAGE> 52
PAGE 52
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
12. REINSURANCE (CONTINUED)
Amounts due from reinsurers included amounts due from ERC of $121,016 and
$133,742 at December 31, 1996 and 1995, respectively. The underlying assets
held by ERC had carrying values of $121,016 and $133,742 and fair values of
$122,639 and $139,222 at December 31, 1996 and 1995, respectively.
13. RETIREMENT AND PROFIT SHARING PLANS
The Company has a defined contribution retirement plan (Defined Contribution
Plan) for all employees who have attained age 21 and completed a year of
service. Contributions to the Plan are made pursuant to salary deferral
elections by participants in an amount equal to 1% to 15% of their annual
compensation. In addition, the Company makes matching contributions in an
amount equal to 50% of each participant's salary deferral to a maximum of 3% of
annual compensation. The Defined Contribution Plan also provides for a
discretionary employer profit sharing contribution, which is determined
annually by the Board of Directors for the succeeding plan year. Profit sharing
contributions are credited to participant's accounts on the basis of their
respective compensation. Salary deferral contribution accounts are at all times
fully vested, while matching contribution and profit sharing contribution
accounts vest ratably from one to five years of service. All participant
accounts are fully vested at death, disability or attainment of age 65. Payment
of vested benefits under the Defined Contribution Plan may be elected by a
participant in a variety of forms of payment. Expenses related to this plan
for the years ended December 31, 1996 amounted to $696.
In addition, the Company has a bonus plan for certain key officers. The amount
available to pay awards for any year is determined by a committee of senior
executives of the Company and is subject to approval of the Board of Directors
of the Company. Awards are based on the performance of the Company and the
performance of eligible participants. The Company accrued or paid $1,700 under
this plan during the year ended December 31, 1996.
The Company provides certain health care and life insurance benefits for
retired employees. Employees meeting certain age and length of service
requirements become eligible for these benefits. The Company's obligation for
accrued
<PAGE> 53
PAGE 53
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
13. RETIREMENT AND PROFIT SHARING PLANS (CONTINUED)
postretirement health and welfare benefits is unfunded. Following is an
analysis of the change in the liability for accrued postretirement benefits for
the year ended December 31, 1996:
<TABLE>
<S> <C>
Accrued postretirement benefits, beginning of year . . . . . . . . . . . . . $ 12,821
-----------
Recognition of components of net periodic postretirement benefit cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 834
-----------
Net periodic postretirement benefit cost . . . . . . . . . . . . . . . . . . 1,078
Benefit payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,213)
-----------
Net change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (135)
-----------
Accrued postretirement benefits, end of year . . . . . . . . . . . . . . . . . $ 12,686
===========
</TABLE>
The liability for accrued postretirement benefits includes the
following at December 31, 1996:
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation:
Retirees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,884
Active eligible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,194
Active ineligible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 831
-----------
12,909
Unrecognized actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . (223)
-----------
Accrued postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . $ 12,686
===========
</TABLE>
For measurement purposes, an 6.5% annual rate increase in the health care cost
trend rate was assumed for 1997; the rate was assumed to decrease gradually to
4.5% by the year 2015 and remain at that level thereafter. The health care cost
trend rate assumption has a significant effect on the amounts reported. To
illustrate, increasing the assumed health care cost trend rates by one
percentage point in each year would increase the accumulated postretirement
health care benefit obligation as of December 31, 1996 by $645 and the
aggregate of the service and interest components of net periodic postretirement
health care benefit cost for 1996 by $127. The weighted average discount rate
used in determining the accumulated postretirement benefit obligation was 7.5%.
14. RELATED PARTY TRANSACTIONS
The Company and its subsidiaries have management and services agreements with
entities affiliated with Knightsbridge, a shareholder. In connection with an
Advisory and Management Services Agreement with Knightsbridge Management,
L.L.C., the Company pays an annual fee of $1,500 plus expenses. Each insurance
subsidiary has an Investment Management Agreement with Knightsbridge
Consultants, L.L.C. For the year ended December 31, 1996, fees incurred totaled
$1,658.
The Company agreed to pay PennCorp, a shareholder, $1,000 in conjunction with
the GSSW transaction (see Note 4).
<PAGE> 54
PAGE 54
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
15. OTHER COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are obligated under operating leases,
primarily for office space. Rent expense, net of sublease income, was $2,058 in
1996.
Minimum lease commitments are:
<TABLE>
<S> <C>
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,720
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
----------
Total minimum payments required . . . . . . . . . . . . $ 2,300
==========
</TABLE>
The Company's office lease expires November 1997. The Company is currently
negotiating a new ten year lease arrangement.
Certain lawsuits have been brought against the Company's life insurance
subsidiaries in the normal course of the insurance business involving the
settlement of various matters and seeking compensatory and in some cases
punitive damages. Management believes that the ultimate settlement of all such
litigation will not have a materially adverse effect on the Company's
consolidated financial position or results of operation.
The life insurance companies are required to be members of various state
insurance guaranty associations in order to conduct business in those states.
These associations have the authority to assess member companies in the event
that an insurance company conducting business in that state is unable to meet
its policyholder obligations. In some states, these assessments can be
partially recovered through a reduction in future premium taxes. The insurance
subsidiaries paid assessments of $1,357 in 1996. Based on information currently
available, the insurance subsidiaries have accrued $3,194 at December 31, 1996
for future assessments, net of future premium tax reductions.
16. OTHER OPERATING INFORMATION
Underwriting and other administrative expenses for the year ended December 31,
1996 are as follows:
<TABLE>
<S> <C>
Non-deferrable commission expense . . . . . . . . . . . . $ 22,437
Taxes, licenses and fees . . . . . . . . . . . . . . . . . 9,214
General and administrative expenses . . . . . . . . . . . 39,241
Expense allowance on reinsurance ceded . . . . . . . . . . (5,782)
----------
Underwriting and other administrative expenses . . . . $ 65,110
==========
</TABLE>
<PAGE> 55
PAGE 55
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
17. FINANCIAL INSTRUMENTS
The following is a summary of the carrying value and estimated fair value of
the Company's financial instruments at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Assets:
Cash and short-term investments . . . . . . . . . . $ 161,895 $ 161,895 $ 196,370 $ 196,370
Fixed maturities . . . . . . . . . . . . . . . . . . 1,255,270 1,255,270 1,169,478 1,169,478
Equity securities . . . . . . . . . . . . . . . . . 1,129 1,129 2,149 2,149
Mortgage loans . . . . . . . . . . . . . . . . . . . 59,993 59,993 99,969 99,969
Policy loans . . . . . . . . . . . . . . . . . . . . 128,551 128,551 137,466 137,466
Collateral loans . . . . . . . . . . . . . . . . . . 21,308 21,308 41,308 41,308
Investment in limited partnership . . . . . . . . . -- -- 39,600 39,600
Other investments . . . . . . . . . . . . . . . . . 5,553 5,553 6,879 6,879
Interest rate cap . . . . . . . . . . . . . . . . . 145 -- 218 --
Agent and premium receivables . . . . . . . . . . . 13,773 13,773 2,509 2,509
Liabilities:
Notes payable . . . . . . . . . . . . . . . . . . . 159,750 159,750 160,000 160,000
Universal life and investment contract liabilities . 1,088,335 1,088,335 1,106,447 1,106,447
</TABLE>
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and Short-term Investments, Agent and Premium Receivables: The
carrying value of short-term investments and amounts receivable
approximate their fair value due to the short-term maturity of these
instruments.
Fixed Maturities and Equities Available for Sale: Fair values for
fixed maturities available for sale are based on quoted market prices,
where available. For fixed maturities not actively traded, fair values
are estimated using values obtained from independent pricing services
or are estimated based on expected future cash flows using a current
market rate applicable to the yield, credit quality, and maturity of
the investments. The fair values for equity securities are based on
quoted market prices.
Mortgage and Collateral Loans: The fair values for mortgage and
collateral loans are estimated using discounted cash flow analyses,
based on interest rates currently being offered for similar loans to
borrowers with similar credit ratings. Loans with similar
characteristics are aggregated for purposes of the calculations.
Investment in limited partnership: Fair values of the Company's
investments in limited partnership at December 31, 1995 is based on
the estimated fair value of the partnership assets and liabilities,
assuming a liquidation of the partnership and distribution of proceeds
to the partners.
<PAGE> 56
PAGE 56
SOUTHWESTERN FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Data with respect to December 31, 1995 is unaudited)
17. FINANCIAL INSTRUMENTS (CONTINUED)
Other Investments: The fair value of Company's investment in residual
interests in mortgage-backed securities was obtained from an
independent broker-dealer. The fair values of other miscellaneous
invested assets have not been estimated due to their relative
immateriality.
Interest rate cap: The fair value of the interest rate cap is $0 as
the current interest rate is below the cap rate.
Policy Loans: Policy loans are an integral part of life insurance
policies which the Company has in force and, in the Company's opinion,
cannot be valued separately. These loans typically carry an interest
rate that is tied to the crediting rate applied to the related policy
and contract reserves.
Notes Payable: Fair values of the Company's bank obligations
approximate carrying values due to the variable interest structure.
The fair value of the Company's note payable to ICH Corporation is
based on the Company's implicit incremental borrowing rate from the
fair value of the Company's bank obligations.
Universal Life and Investment Contract Liabilities: The carrying value
and fair values for the Company's liabilities under universal life and
investment-type insurance contracts are the same as the interest rates
credited to these products are periodically adjusted by the Company to
reflect market conditions. The fair values of liabilities under all
insurance contracts are taken into consideration in the overall
management of interest rate risk, which minimizes exposure to changing
interest rates through the matching of investment maturities with
amounts due under insurance contracts.
18. SUBSEQUENT EVENT
In early 1997, PennCorp entered into an agreement to acquire all of the
outstanding SWF common stock held by Knightsbridge and certain other parties.
Assuming completion of the transaction, SWF would become a wholly-owned
subsidiary of PennCorp. The transaction is subject to the approval of the
shareholders of PennCorp.
<PAGE> 57
PAGE 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents
1. Exhibits
2.1 Purchase Agreement among I.C.H. Corporation, SWL
Holding Corporation, Care Financial Corporation,
Facilities Management Installation, Inc. and
Southwestern Financial Corporation, Southwestern
Financial Services Corporation and PennCorp Financial
Group, Inc., dated as of December 1, 1995 and
Addendum to Purchase Agreement dated as of December
14, 1995. (8)
2.2 Amended and Restated Stock Purchase Agreement between
United Companies Financial Corporation and Pacific
Life and Accident Insurance Company dated as of July
24, 1996. (6)
2.3 Amended and Restated Agreement and Plan of Merger
dated as of November 25, 1996 by and between PennCorp
Financial Group, Inc. and Washington National
Corporation. (4)
3.1 Restated By-Laws of PennCorp Financial Group, Inc.
(14)
3.3 Second Restated Certificate of Incorporation of
PennCorp Financial Group, Inc. as amended. (9)
4.1 Certificate of Designation of Series C Preferred
Stock. (7)
4.2 Corrected Certificate of Designation of $3.375
Convertible Preferred Stock. (7)
4.3 Certificate of Designation of $3.50 Series II
Convertible Preferred Stock (5)
4.4 Indenture between PennCorp Financial Group, Inc. and
The Bank of New York, as trustee, with respect to 9
1/4% Senior Subordinate Notes due 2003. (13)
<PAGE> 58
PAGE 58
10.1 Surplus Debenture Number Four in the original
principal amount of $162,539,890, issued by Pacific
Life and Accident Insurance Company to PennCorp
Financial Group, Inc., dated January 1, 1994. (12)
10.2 Surplus Debenture Number Five in the original
principal amount of $17,606,203, issued by Pacific
Life and Accident Insurance Company to PennCorp
Financial Group, Inc., dated September 29, 1994.
(11)
10.3 Surplus Debenture Number Six in the original
principal amount of $55,000,000, issued by Pacific
Life and Accident Insurance Company to PennCorp
Financial Group, Inc., dated July 24, 1996. (3)
10.4 10% Promissory Note in the original principal amount
of $30,661,996, issued by American- Holdings
Corporation to Pennsylvania Life Insurance Company,
dated July 1, 1996. (3)
10.5 Certificate of Contribution in the original principal
amount of $54,332,790 issued by Integon Financial
Life Insurance Corporation to Integon Life
Corporation, dated July 25, 1995. (7)
-----------------------------------------------------
MANAGEMENT COMPENSATION
RELATED AGREEMENTS
10.6 Employment Agreement, dated as of August 19, 1990,
between PennCorp Financial Group, Inc. and William M.
McCormick. (15)
10.7 PennCorp Financial, Inc. Retirement and Savings Plan.
(15)
10.8 PennCorp Financial, Inc. Executive Officer Incentive
Plan. (15)
10.9 PennCorp Financial Group, Inc. 1992 Stock Option
Plan. (15)
10.10 PennCorp Financial Group, Inc. Senior Management
Warrant Award Program. (15)
10.11 Form of Restricted Stock Agreement By and Between
PennCorp Financial Group, Inc. and certain
participants, effective as of April 1, 1994. (11)
10.12 Employment Agreement between PennCorp Financial
Group, Inc. and David J. Stone entered into June 7,
1996. (3)
10.13 Employment Agreement between PennCorp Financial
Group, Inc. and Steven W. Fickes entered into June 7,
1996. (3)
10.14 Amendment Number One to Employment Agreement between
PennCorp Financial Group, Inc. and David J. Stone
dated April 28, 1997. (1)
10.15 Amendment Number One to Employment Agreement between
PennCorp
<PAGE> 59
PAGE 59
Financial Group, Inc. and Steven W. Fickes dated
April 28, 1997. (1)
10.16 PennCorp Financial Group, Inc. 1996 Stock Award and
Stock Option Plan (3)
10.17 PennCorp Financial Group, Inc. 1996 Senior Executive
Annual Incentive Award Plan (3)
10.18 Real Estate Purchase and Sale Agreement between
Peoples Security Life Insurance Company and PennCorp
Financial Group, Inc., dated March 24, 1995. (10)
10.19 Registration Rights Agreement dated as of December
14, 1995, between PennCorp Financial Group, Inc.,
I.C.H. Corporation, SWL Holding Corporation and Care
Financial Corporation. (8)
10.20 Conversion, Standstill and Registration Rights
Agreement between United Companies Financial
Corporation and PennCorp Financial Group, Inc. dated
as of July 24, 1996. (3)
10.21 Registration Rights Agreement dated as of August 2,
1996, by and among PennCorp Financial Group, Inc.,
Smith Barney Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Merrill Lynch, Pierce,
Fenner & Smith Incorporated. (3)
10.22 Stockholders Agreement dated December 14, 1995
between Southwestern Financial Corporation and the
Security holders listed on the signature pages
thereof. (8)
10.23 Credit Agreement dated March 12, 1997 by and among
PennCorp Financial Group, Inc. and The Chase
Manhattan Bank, The First National Bank of Chicago,
and Nationsbank, NA., as Managing Agents, Fleet
National Bank, Mellon Bank, N.A., Bank of Montreal,
CIBC Inc., and Dresdner Bank AG, New York Branch and
Grand Cayman Branch as Co-Agents and The Bank of New
York, as Administrative Agent. (2)
<PAGE> 60
PAGE 60
11 Computations of earnings per share. (3)
12.1 Computation of ratio of earnings to fixed charges.
(3)
12.2 Computation of ratio of EBITDA to interest expense.
(3)
21 List of subsidiaries of the Registrant. (3)
22 Consent of Independent Auditors (1)
99.1 Consent to be named director nominee of PennCorp
Financial Group, Inc. by Ronald L. Bornheutter dated
as of April 30, 1997. (2)
99.2 Consent to be named director nominee of PennCorp
Financial Group, Inc. by W. Francis Brennan dated as
of April 30, 1997. (2)
(1) Filed herewith.
(2) Such exhibit is incorporated by reference to the Annual Report on
Form 10-K/A Amendment No. 1 for the fiscal year ended December 31,
1996, of PennCorp Financial Group, Inc.
(3) Such exhibit is incorporated by reference to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1996, of PennCorp
Financial Group, Inc.
(4) Such exhibit is incorporated by reference to the Form 8-K dated
November 25, 1996, which was filed with the Securities and Exchange
Commission by PennCorp Financial Group, Inc. on December 4, 1996,
providing a copy of the Amended and Restated Agreement and Plan of
Merger with Washington National Corporation.
(5) Such exhibit is incorporated by reference to the Registration
Statement on Form S-3 (Registration No. 333- 13285) of PennCorp
Financial Group, Inc. which was filed with the Securities and
Exchange Commission on October 10, 1996.
(6) Such exhibit is incorporated by reference to the Form 8-K dated
July 24, 1996 which was filed with the Securities and Exchange
Commission by PennCorp Financial Group, Inc. on August 8, 1996
relating to the financial statements and pro forma financial
information of the United Companies Life Insurance Company.
(7) Such exhibit is incorporated by reference to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 of PennCorp
Financial Group, Inc.
(8) Such exhibit is incorporated by reference to the Form 8-K dated
December 14, 1995 which was filed by PennCorp Financial Group, Inc.
with the Securities and Exchange Commission on December 28, 1995
related to its investment in Southwestern Financial Corporation.
(9) Such exhibit is incorporated by reference to the Form 8-A dated
July 11, 1995 which was filed by PennCorp Financial Group, Inc.
with the Securities and Exchange Commission on July 12, 1995.
(10) Such exhibit is incorporated by reference to the Quarterly Report
on Form 10-Q for the three months ended June 30, 1995 of PennCorp
Financial Group, Inc.
<PAGE> 61
PAGE 61
(11) Such exhibit is incorporated by reference to the Quarterly Report
on Form 10-Q for the three months ended September 30, 1994 of
PennCorp Financial Group, Inc.
(12) Such exhibit is incorporated by reference to the Quarterly Report
on Form 10-Q for the three months ended June 30, 1994 of PennCorp
Financial Group, Inc.
(13) Such exhibit is incorporated by reference to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1993 of PennCorp
Financial Group, Inc.
(14) Such exhibit is incorporated by reference to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1992 of PennCorp
Financial Group, Inc.
(15) Such exhibit is incorporated by reference to the Registration
Statement on Form S-1 (Registration No. 33- 50530) of PennCorp
Financial Group, Inc.
(b) Reports on Form 8-K.
A report on Form 8-K/A (Amendment No. 1) dated January 29, 1996 was
filed with the Securities and Exchange Commission on February 21,
1996 related to the Company's economic participation in
Southwestern Financial Corporation providing the audited combined
financial statements as of December 31, 1994 and 1993 and for each
of the years in the three-year period ended December 31, 1994 and
unaudited combined financial statements as of September 30, 1995
and for the nine-month period ended September 30, 1995 for the
insurance operations of I.C.H. Corporation acquired by Southwestern
Financial Corporation, the Notes thereto and the Independent
Auditors' Report with respect thereto, and the unaudited pro forma
statements of operations of the Company for the year ended December
31, 1994 and for the nine-months ended September 30, 1995, and the
unaudited pro forma balance sheet of the Company as of September
30, 1995 and the Notes thereto, reflecting the consummation of the
investment by the Company in Southwestern Financial Corporation.
A report on Form 8-K, dated July 17, 1996, was filed with the
Securities and Exchange Commission by PennCorp Financial Group,
Inc. on July 17, 1996, relating to its acquisition of United
Companies Life Insurance Company.
A report on Form 8-K, dated August 5, 1996, was filed with the
Securities and Exchange Commission by PennCorp Financial Group,
Inc. on August 5, 1996, relating to the press release announcing
the pricing of its $3.50 Series II Convertible Preferred Stock.
A report on Form 8-K, dated July 24, 1996 was filed with the
Securities and Exchange Commission by PennCorp Financial Group,
Inc. on August 8, 1996 relating to the financial statements and pro
forma financial information of the United Companies Life Insurance
Company.
A report on Form 8-K, dated November 15, 1996, was filed with the
Securities and Exchange Commission by PennCorp Financial Group,
Inc. on November 15, 1996, relating to the press release announcing
the signing of a definitive Merger Agreement with Washington
National Corporation.
A report on Form 8-K, dated November 25, 1996, was filed with the
Securities and Exchange Commission by PennCorp Financial Group,
Inc. on December 4, 1996, providing a copy of the Amended and
Restated Agreement and Plan of Merger with Washington National
Corporation.
<PAGE> 62
PAGE 62
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15 (d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
PennCorp Financial Group, Inc.
(Registrant)
Dated: July 1, 1997 By: /s/ Scott D. Silverman
-----------------------------------
Scott D. Silverman
Senior Vice President, General
Counsel and Secretary
<PAGE> 63
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
2.1 Purchase Agreement among I.C.H. Corporation, SWL
Holding Corporation, Care Financial Corporation,
Facilities Management Installation, Inc. and
Southwestern Financial Corporation, Southwestern
Financial Services Corporation and PennCorp Financial
Group, Inc., dated as of December 1, 1995 and
Addendum to Purchase Agreement dated as of December
14, 1995. (8)
2.2 Amended and Restated Stock Purchase Agreement between
United Companies Financial Corporation and Pacific
Life and Accident Insurance Company dated as of July
24, 1996. (6)
2.3 Amended and Restated Agreement and Plan of Merger
dated as of November 25, 1996 by and between PennCorp
Financial Group, Inc. and Washington National
Corporation. (4)
3.1 Restated By-Laws of PennCorp Financial Group, Inc.
(14)
3.3 Second Restated Certificate of Incorporation of
PennCorp Financial Group, Inc. as amended. (9)
4.1 Certificate of Designation of Series C Preferred
Stock. (7)
4.2 Corrected Certificate of Designation of $3.375
Convertible Preferred Stock. (7)
4.3 Certificate of Designation of $3.50 Series II
Convertible Preferred Stock (5)
4.4 Indenture between PennCorp Financial Group, Inc. and
The Bank of New York, as trustee, with respect to 9
1/4% Senior Subordinate Notes due 2003. (13)
<PAGE> 64
10.1 Surplus Debenture Number Four in the original
principal amount of $162,539,890, issued by Pacific
Life and Accident Insurance Company to PennCorp
Financial Group, Inc., dated January 1, 1994. (12)
10.2 Surplus Debenture Number Five in the original
principal amount of $17,606,203, issued by Pacific
Life and Accident Insurance Company to PennCorp
Financial Group, Inc., dated September 29, 1994.
(11)
10.3 Surplus Debenture Number Six in the original
principal amount of $55,000,000, issued by Pacific
Life and Accident Insurance Company to PennCorp
Financial Group, Inc., dated July 24, 1996. (3)
10.4 10% Promissory Note in the original principal amount
of $30,661,996, issued by American- Holdings
Corporation to Pennsylvania Life Insurance Company,
dated July 1, 1996. (3)
10.5 Certificate of Contribution in the original principal
amount of $54,332,790 issued by Integon Financial
Life Insurance Corporation to Integon Life
Corporation, dated July 25, 1995. (7)
-----------------------------------------------------
MANAGEMENT COMPENSATION
RELATED AGREEMENTS
10.6 Employment Agreement, dated as of August 19, 1990,
between PennCorp Financial Group, Inc. and William M.
McCormick. (15)
10.7 PennCorp Financial, Inc. Retirement and Savings Plan.
(15)
10.8 PennCorp Financial, Inc. Executive Officer Incentive
Plan. (15)
10.9 PennCorp Financial Group, Inc. 1992 Stock Option
Plan. (15)
10.10 PennCorp Financial Group, Inc. Senior Management
Warrant Award Program. (15)
10.11 Form of Restricted Stock Agreement By and Between
PennCorp Financial Group, Inc. and certain
participants, effective as of April 1, 1994. (11)
10.12 Employment Agreement between PennCorp Financial
Group, Inc. and David J. Stone entered into June 7,
1996. (3)
10.13 Employment Agreement between PennCorp Financial
Group, Inc. and Steven W. Fickes entered into June 7,
1996. (3)
10.14 Amendment Number One to Employment Agreement between
PennCorp Financial Group, Inc. and David J. Stone
dated April 28, 1997. (1)
10.15 Amendment Number One to Employment Agreement between
PennCorp
<PAGE> 65
Financial Group, Inc. and Steven W. Fickes dated
April 28, 1997. (1)
10.16 PennCorp Financial Group, Inc. 1996 Stock Award and
Stock Option Plan (3)
10.17 PennCorp Financial Group, Inc. 1996 Senior Executive
Annual Incentive Award Plan (3)
10.18 Real Estate Purchase and Sale Agreement between
Peoples Security Life Insurance Company and PennCorp
Financial Group, Inc., dated March 24, 1995. (10)
10.19 Registration Rights Agreement dated as of December
14, 1995, between PennCorp Financial Group, Inc.,
I.C.H. Corporation, SWL Holding Corporation and Care
Financial Corporation. (8)
10.20 Conversion, Standstill and Registration Rights
Agreement between United Companies Financial
Corporation and PennCorp Financial Group, Inc. dated
as of July 24, 1996. (3)
10.21 Registration Rights Agreement dated as of August 2,
1996, by and among PennCorp Financial Group, Inc.,
Smith Barney Inc., Donaldson, Lufkin & Jenrette
Securities Corporation and Merrill Lynch, Pierce,
Fenner & Smith Incorporated. (3)
10.22 Stockholders Agreement dated December 14, 1995
between Southwestern Financial Corporation and the
Security holders listed on the signature pages
thereof. (8)
10.23 Credit Agreement dated March 12, 1997 by and among
PennCorp Financial Group, Inc. and The Chase
Manhattan Bank, The First National Bank of Chicago,
and Nationsbank, NA., as Managing Agents, Fleet
National Bank, Mellon Bank, N.A., Bank of Montreal,
CIBC Inc., and Dresdner Bank AG, New York Branch and
Grand Cayman Branch as Co-Agents and The Bank of New
York, as Administrative Agent.(2)
<PAGE> 66
11 Computations of earnings per share. (3)
12.1 Computation of ratio of earnings to fixed charges.
(3)
12.2 Computation of ratio of EBITDA to interest expense.
(3)
21 List of subsidiaries of the Registrant. (3)
22 Consent of Independent Auditors (1)
99.1 Consent to be named director nominee of PennCorp
Financial Group, Inc. by Ronald L. Bornheutter dated
as of April 30, 1997. (2)
99.2 Consent to be named director nominee of PennCorp
Financial Group, Inc. by W. Francis Brennan dated as
of April 30, 1997. (2)
(1) Filed herewith.
(2) Such exhibit is incorporated by reference to the Annual Report on
Form 10-K/A Amendment No. 1 for the fiscal year ended December 31,
1996, of PennCorp Financial Group, Inc.
(3) Such exhibit is incorporated by reference to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1991, of PennCorp
Financial Group, Inc.
(4) Such exhibit is incorporated by reference to the Form 8-K dated
November 25, 1996, which was filed with the Securities and Exchange
Commission by PennCorp Financial Group, Inc. on December 4, 1996,
providing a copy of the Amended and Restated Agreement and Plan of
Merger with Washington National Corporation.
(5) Such exhibit is incorporated by reference to the Registration
Statement on Form S-3 (Registration No. 333- 13285) of PennCorp
Financial Group, Inc. which was filed with the Securities and
Exchange Commission on October 10, 1996.
(6) Such exhibit is incorporated by reference to the Form 8-K dated
July 24, 1996 which was filed with the Securities and Exchange
Commission by PennCorp Financial Group, Inc. on August 8, 1996
relating to the financial statements and pro forma financial
information of the United Companies Life Insurance Company.
(7) Such exhibit is incorporated by reference to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1995 of PennCorp
Financial Group, Inc.
(8) Such exhibit is incorporated by reference to the Form 8-K dated
December 14, 1995 which was filed by PennCorp Financial Group, Inc.
with the Securities and Exchange Commission on December 28, 1995
related to its investment in Southwestern Financial Corporation.
(9) Such exhibit is incorporated by reference to the Form 8-A dated
July 11, 1995 which was filed by PennCorp Financial Group, Inc.
with the Securities and Exchange Commission on July 12, 1995.
(10) Such exhibit is incorporated by reference to the Quarterly Report
on Form 10-Q for the three months ended June 30, 1995 of PennCorp
Financial Group, Inc.
<PAGE> 67
(11) Such exhibit is incorporated by reference to the Quarterly Report
on Form 10-Q for the three months ended September 30, 1994 of
PennCorp Financial Group, Inc.
(12) Such exhibit is incorporated by reference to the Quarterly Report
on Form 10-Q for the three months ended June 30, 1994 of PennCorp
Financial Group, Inc.
(13) Such exhibit is incorporated by reference to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1993 of PennCorp
Financial Group, Inc.
(14) Such exhibit is incorporated by reference to the Annual Report on
Form 10-K for the fiscal year ended December 31, 1992 of PennCorp
Financial Group, Inc.
(15) Such exhibit is incorporated by reference to the Registration
Statement on Form S-1 (Registration No. 33- 50530) of PennCorp
Financial Group, Inc.
<PAGE> 1
EXHIBIT 10.14
AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT
Amendment Number One ("Amendment No. 1"), made and entered into as of the 28th
day of April, 1997 by and between PennCorp Financial Group, Inc., a Delaware
corporation (together with its successors and assigns permitted under the
Agreement (as hereinafter defined), the "Company"), and David J. Stone (the
"Executive").
WHEREAS, the Company and the Executive are parties to an Employment Agreement
made and entered into as of the 7th day of June, 1996 (the "Agreement"); and
WHEREAS, due to a clerical error, the Exercise Price Per Share for each
tranche of the option granted to the Executive as stated in Section 6 of the
Agreement is incorrect; and
WHEREAS, the Company and the Executive wish to amend the Agreement to reflect
the correct Exercise Price Per Share of each tranche of the option granted to
the Executive;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually a
"Party" and together the "Parties") agree as follows:
1. Section 6 of the Agreement is hereby deleted in its entirety and the
following inserted in its place instead:
6. Long-Term Incentive Award.
Provided that the Stock Plan is approved by the Company's
shareholders, the Executive shall participate in the Stock
Plan and shall be granted under the Stock Plan, as of the
Effective Date, an option to purchase 559,000 shares of Stock.
The option shall be divided into four tranches as set forth
below:
<TABLE>
<CAPTION>
Number of Shares of Exercise Price
Tranche Stock Underlying Tranche Per Share
-------- ------------------------ -------------
<S> <C> <C>
1 250,000 $28.875
2 103,000 $31.762
3 103,000 $34.939
4 103,000 $38.404
</TABLE>
Twenty-five percent of each tranche shall become exercisable
(vest) on the first four anniversaries of the Effective Date
and the option shall expire on the fifth anniversary of the
Effective Date.
2. All terms used in this Amendment No. 1 shall have the same meaning as
in the Agreement.
3. Except as modified in this Amendment No. 1, all other terms and
provisions of the Agreement remain in full force and effect and
unchanged.
4. This Amendment No. 1 may be executed in two or more counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1 as of
the date first written above.
PENNCORP FINANCIAL GROUP, INC.
By: /s/ SCOTT D. SILVERMAN By: /s/ DAVID J. STONE
--------------------------------------- ---------------------------
Scott D. Silverman David J. Stone
Senior Vice President, General Counsel
and Secretary
By: /s/ KENNETH ROMAN
---------------------------------------
Kenneth Roman
Chairman Compensation
Committee
<PAGE> 1
EXHIBIT 10.15
AMENDMENT NUMBER ONE TO EMPLOYMENT AGREEMENT
Amendment Number One ("Amendment No. 1"), made and entered into as of the 28th
day of April, 1997 by and between PennCorp Financial Group, Inc., a Delaware
corporation (together with its successors and assigns permitted under the
Agreement (as hereinafter defined), the "Company"), and Steven W. Fickes (the
"Executive").
WHEREAS, the Company and the Executive are parties to an Employment Agreement
made and entered into as of the 7th day of June, 1996 (the "Agreement"); and
WHEREAS, due to a clerical error, the Exercise Price Per Share for each
tranche of the option granted to the Executive as stated in Section 6 of the
Agreement is incorrect; and
WHEREAS, the Company and the Executive wish to amend the Agreement to reflect
the correct Exercise Price Per Share of each tranche of the option granted to
the Executive;
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein and for other good and valuable consideration, the receipt of
which is mutually acknowledged, the Company and the Executive (individually a
"Party" and together the "Parties") agree as follows:
1. Section 6 of the Agreement is hereby deleted in its entirety and the
following inserted in its place instead:
6. Long-Term Incentive Award.
Provided that the Stock Plan is approved by the Company's
shareholders, the Executive shall participate in the Stock
Plan and shall be granted under the Stock Plan, as of the
Effective Date, an option to purchase 559,000 shares of Stock.
The option shall be divided into four tranches as set forth
below:
<TABLE>
<CAPTION>
Number of Shares of Exercise Price
Tranche Stock Underlying Tranche Per Share
-------- ------------------------ --------------
<S> <C> <C>
1 250,000 28.875
2 103,000 31.762
3 103,000 34.939
4 103,000 38.404
</TABLE>
Twenty-five percent of each tranche shall become exercisable
(vest) on the first four anniversaries of the Effective Date
and the option shall expire on the fifth anniversary of the
Effective Date.
2. All terms used in this Amendment No. 1 shall have the same meaning as
in the Agreement.
3. Except as modified in this Amendment No. 1, all other terms and
provisions of the Agreement remain in full force and effect and
unchanged.
4. This Amendment No. 1 may be executed in two or more counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Amendment No. 1 as of
the date first written above.
PENNCORP FINANCIAL GROUP, INC.
By: /s/ SCOTT D. SILVERMAN By: /s/ STEVEN W. FICKES
-------------------------------------------- ------------------------
Scott D. Silverman Steven W. Fickes
Senior Vice President, General Counsel
and Secretary
By: /s/ KENNETH ROMAN
--------------------------------------------
Kenneth Roman
Chairman Compensation
Committee
<PAGE> 1
EXHIBIT 22
INDEPENDENT AUDITOR'S CONSENT
The Shareholders and Board of Directors
PennCorp Financial Group, Inc.:
We consent to incorporation by reference in the registration statements (Nos.
333-2930 and 333-2928) on Form S-8 of PennCorp Financial Group, Inc. of our
report dated February 28, 1997, relating to the consolidated balance sheets of
PennCorp Financial Group, Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1996, and all related schedules, which report appears in the December 31,
1996 annual report on Form 10-K/A Amendment No. 2 of PennCorp Financial Group,
Inc.
KPMG PEAT MARWICK LLP
Raleigh, North Carolina
July 1, 1997
